Inflation, 2026 COLA and the Latest Consumer Price Index

Annual Inflation Lowest Since 2021

Inflation is generally down. Here is a quick summary:

• The “Core CPI”, which does not include the cost of food & energy, increased 0.2% in April. This was below a forecasted rate of 0.3%.
• The 12-month rise in CPI dropped to 2.3% in April from 2.4% in the previous month. This is the smallest increase since 2021.
• The increase in the core CPI in the past 12 months was unchanged in April and remained at 2.8%

The latest consumer price index (CPI) was up 0.2% over the month, while annual inflation rose 2.3%. The 2.3% rate of annual inflation is the lowest inflation rate since February 2021. That month was just before supply-chain snarls and pent-up consumer demand sent inflation up to its highest point in decades.

Earlier this week, the U.S. and China agreed to cut tariffs on each other’s products—at least temporarily. Businesses working with China welcomed the 90-day pause. The rapidly changing details of President Trump’s tariff policies create significant challenges to many businesses as the underlying policies keep changing.

The fluctuation in tariff policies could also make it hard for the Federal Reserve to cut interest rates.

Inflation and the 2026 COLA

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 2.1% over the last 12 months. For the month, the index increased 0.3%.

While the annual COLA for 2026 will not be finalized until mid-October, the latest projection for a full COLA next year is 2.3%. This index is the one used to calculate the annual COLA for Social Security and federal employee retirement programs.

Currently, CSRS and Social Security COLAs are based on the annual change in the CPI-W. The COLA rates for FERS employees are capped at 2% when the CPI-W increases between 2 and 3%. These are reduced by 2% when the CPI-W increases by 3% or more. Federal employees often see articles arguing against the differential between CSRS and FERS for the annual COLA.

Here are the reasons for the difference between the COLA adjustments.

• FERS is a three-tiered retirement system. FERS includes a basic annuity, Social Security, and Thrift Savings Plan (TSP) contributions, while CSRS is a single-component system. 
• TSP contributions: FERS retirees receive a government matching contribution to their TSP accounts, assuming they contribute at least 5% of their earnings. 
• Congressional intent: The lower FERS COLA was intended to balance the retirement benefits between FERS and CSRS, considering the additional contributions to TSP and Social Security. 

TSP Returns in May

In addition to the annual COLA, another big factor in federal employee retirement income is the Thrift Savings Plan (TSP). So far in May, the TSP returns are favorable.

The TSP’s core stock funds (C, S and I Funds) are all up through May 12, 2025 as outlined in the chart below. This chart is much more favorable than it was at about the same time last month. The stock market has had a significant rebound in the last several weeks as there are indications President Trump’s tariff policies are achieving results and more likely to yield favorable results for the United States in lowering tariffs imposed by other countries.

TSP investors are likely to see more rapid changes in stock prices in coming weeks. Stock prices go up or down depending on the latest headlines. While negotiations with various countries continue, these headlines will vary and stock market prices will often follow the trend.

As the Wall Street Journal noted in this article when evaluating how stock investors have fared during this highly volatile period:

• Investors who remained invested in stocks during the market volatility saw gains as stocks recovered.
• Some investors shifted to cash (think of the G Fund for TSP investors), prioritizing stability over potential gains.
• Investors say committing to a diversified, buy-and-hold strategy isn’t easy when markets are volatile.