If you're a current or future federal retiree, inflation isn't just a news headline — it's something that directly impacts your income year after year. The Cost-of-Living Adjustment (COLA) exists to help your retirement benefits keep pace with rising prices, but how well it works depends on one powerful metric: the Consumer Price Index (CPI-W).

As we look ahead to the 2026 COLA, many are wondering how current inflation trends and economic shifts will influence next year's adjustment. Whether you're already receiving a federal annuity or planning your retirement income strategy, staying informed is essential.

Here's what you need to know right now — and what you should be preparing for in 2026.

Understanding the CPI-W: The Inflation Gauge That Drives COLA

Each year, the federal government calculates COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This measure tracks how much prices increase for everyday goods and services — things like food, gas, utilities, healthcare, and housing.

COLAs are determined by comparing the average CPI-W from July through September of one year to the same period in the previous year. If prices rose, retirees get a percentage increase in their benefits for the following January.

Why This Matters:

  • A higher CPI-W means a larger COLA, which increases your monthly annuity.
  • A lower CPI-W or deflation can result in zero increase, despite rising personal expenses.
  • The CPI-W doesn't always reflect actual retiree spending, especially for healthcare.

Where Inflation Stands Now — and What It Could Mean for 2026

Recent reports show that inflation has cooled from its 2022-2023 highs, but it remains elevated compared to pre-2020 levels. The latest CPI-W data reveals moderate increases in categories like shelter and medical care, while energy prices remain volatile.

If the current trend continues, experts predict the 2026 COLA could land between 2.1% and 3.0% — lower than the unusually high adjustments seen in 2023 (8.7%) and 2024 (3.2%), but still meaningful in terms of long-term retirement planning.

Keep in mind: COLAs aren't guaranteed to match the actual rise in your personal expenses — particularly if you're dealing with higher healthcare costs or increased housing taxes.

What a Lower COLA Means for Retirees

A smaller COLA doesn't just mean a smaller raise. It can have a ripple effect on your retirement plan:

  • Purchasing Power Shrinks: As prices rise faster than your benefit increases, your dollars don't go as far.
  • Medical Costs Widen the Gap: Healthcare expenses often rise faster than general inflation, and federal retirees may feel the pinch, especially if enrolled in FEHB without Medicare.
  • Budget Pressure Increases: For those on fixed incomes, even a 1-2% shortfall can stress your monthly finances over time.

If you're not adjusting your plan regularly to account for fluctuating COLAs, you could end up relying more heavily on savings or reducing your standard of living.

How COLAs Affect FERS vs. CSRS Retirees

One important distinction often overlooked is how COLAs apply differently to retirees under the FERS and CSRS systems.

  • CSRS retirees receive the full COLA, no matter what.
  • FERS retirees, however, get the full COLA only if it's 2% or less. If inflation is between 2% and 3%, they receive a COLA that's 1% less than the actual rate. Above 3%, they get COLA minus 1%.

Example:

If the 2026 COLA is 3%, FERS retirees would receive only 2%.

This formula creates a COLA gap over time for FERS participants — especially concerning as inflation slowly erodes purchasing power.

What Should You Do Right Now?

1. Track COLA Predictions

Keep an eye on CPI-W trends from July to September 2025. This period directly determines your 2026 COLA. Many financial professionals begin modeling budget adjustments during this time.

2. Review Your Income Strategy

Don't rely on COLAs alone to maintain your lifestyle. Consider layering your income sources:

  • TSP withdrawals
  • Roth IRA income
  • Annuities with inflation-adjusted payouts
  • Health Savings Accounts (HSAs) for medical needs

3. Revisit Your Expenses

If you're within five years of retirement or already retired, review how inflation is affecting your budget. Focus especially on:

  • Prescription costs
  • Long-term care premiums
  • Property taxes and utilities

Planning for a Shifting Economy

Inflation doesn't follow a straight line — and neither should your retirement plan. While COLAs are a helpful tool, they don't guarantee that your money will maintain the same value year after year. That's why your planning approach must be flexible and proactive.

Waiting for the annual COLA update to “fix” your income shortfall isn't a strategy — it's a gamble.

Whether you're preparing to retire in the next few years or managing your annuity today, understanding how inflation affects your income is critical. The cost of waiting — or guessing — can be substantial.