Inflation Just Cooled Again, Which Is Good and Bad News For Retirees on Social Security

News of cooling inflation brings a double-edged impact on retirees who depend on Social Security senior benefits. While a drop in inflation may help reduce prices and ease the financial strain that many are feeling this year, the timing of the drop may also shrink the cost-of-living adjustment Social Security recipients should receive next year.

If you or a loved one receive Social Security benefits, here's what you should know about current inflation rates and what might happen to benefits in 2027.

The June inflation drop

Data indicates that inflation dropped in June, which is welcome news for many consumers. The Personal Consumption Expenditures price index dropped by 0.1% from May to June, marking the first inflation decline in June over the past six years.

According to the Bureau of Labor Statistics, the Consumer Price Index rose 3.5% year over year in June, marking a slowdown from the 4.2% year-over-year increase seen in May.

The decline in inflation was driven by dropping energy prices that resulted from the Memorandum of Understanding and ceasefire that the United States reached with Iran in June. Gas and energy prices declined by 9.2% in June, offering consumers some relief at the pump, but after the war resumed, gas prices climbed above $4 a gallon again.

The trade-off of lower inflation

Lower inflation may help retirees better afford expenses like gas and groceries, but it has a trade-off for Social Security recipients. The cost-of-living adjustment (COLA) is calculated annually to ensure Social Security benefits keep up with inflation. Specifically, the calculation uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) data, and the calculation is based only on third-quarter data from July, August, and September.

Retirees have been paying higher costs for most of the year because of increased inflation. But if inflation drops heading into July and remains low, it might result in a lower COLA for 2027, meaning benefits might only be slightly increased, or potentially not increased at all, in 2027.

What analysts are predicting for the 2027 COLA

As inflation has dropped, so have predictions for the 2027 COLA. In June, independent analyst Mary Johnson projected a 4.7% 2027 COLA, but she has since lowered her projection by a full percentage point to 3.7%. The Senior Citizens League has also projected the COLA to be 3.8%, a very close alignment with Johnson's projection.

Since the COLA is calculated based on third-quarter CPI-W data, the July report due August 12 is the first data release that actually counts toward the COLA. Until that is released, projections are based on data that doesn't actually impact the COLA. The Social Security Administration generally announces the official COLA in mid-October, and every current number is a forecast, not a guarantee.

Why the benefits increase still won't feel like a windfall

The COLA helps benefits keep up with inflation, so even a 3.8% increase won't feel like a windfall. As inflation drives up prices, that extra money may be quickly consumed by the price increases.

The benefits increase may also be partly eaten by rising Medicare costs. In 2026, a $17.90 jump in the Medicare Part B monthly premium absorbed much of the year's 2.8% COLA increase. According to the Social Security and Medicare Trustees Report, Part B premiums may increase by 3.5% in 2027, an increase of $6.60 per month compared to 2026. While it's a smaller price hike than the 10% increase of 2026, that monthly cost may eat into any Social Security benefits increases.

Does the COLA miss the mark for retirees

Advocates also question whether the COLA formula is really working for retirees. The Senior Citizens League found that Social Security benefits lost approximately 13.7% of their buying power over the past decade, suggesting the COLA is not doing its job of keeping up with inflation, meaning those benefit increases may feel even smaller for retirees.

The COLA calculation uses CPI-W data, but the CPI-W index tracks the spending of working-age households and isn't specialized for retirees. Retirees may actually spend more of their income on expenses like health care, prescription drugs, and housing, and those costs tend to rise faster than inflation rates. The COLA formula may miss the mark and not accurately reflect the actual increasing expenses that retirees must pay.

Bottom line

While a COLA may increase 2027 benefits and offer some relief from rising costs, the increase is uncertain at this time and may not keep pace with all expenses retirees see. Rather than banking on a COLA for 2027, it may be a good idea to look at other ways to stretch your budget. Maybe you're able to trim some expenses or supplement your income with gig work or consulting work to stretch your money more.

News on the official COLA should come out in October, but now is the time to start identifying some alternative ways to save or generate more income if your retirement savings are stretched thin.

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