Fed Chair Kevin Warsh Just Raised New Inflation Concerns. Here's What It Could Mean for Your 2027 Social Security COLA.

Key Points

• Warsh warned about persistent inflation in his Jackson Hole speech last week.
• If inflation rises, so will next year's Social Security COLA.
• The recent escalation in the Iran war could make a higher COLA more likely.
• The $23,760 Social Security bonus most retirees completely overlook ›

New Federal Reserve Chair Kevin Warsh's job description doesn't mention anything about Social Security. But that doesn't mean that his moves can't impact the program that serves over 75 million Americans. Actually, what Warsh and his fellow Federal Open Market Committee (FOMC) members do can directly affect Social Security recipients.

Last week, Warsh delivered a highly anticipated speech at the Fed's annual symposium in Jackson Hole, Wyoming. His comments raised new inflation concerns. Here's what that could mean for the 2027 Social Security cost-of-living adjustment (COLA).

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Federal Reserve Chair Kevin Warsh. Image source: Official Federal Reserve Photo.

What Warsh said

Warsh emphasized the importance of the Federal Reserve's role in keeping inflation at bay. He noted, "If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it? Not the financial highfliers. Hard-working Americans are the ones left to deal with inflation that is too high or jobs that suddenly appear less secure."

To make sure that no one missed his point, Warsh added later in his speech, "It is the Fed's job to deliver stable prices." And he referred to the latest inflation numbers as "concerning." The Fed's top inflation metric, the Personal Consumption Expenditures (PCE) price index, increased 3.7% over the last 12 months and 4.1% over the last six months, well above the Fed's target of 2%. Of particular note, Warsh said that the "underlying trends" have not "meaningfully improved."

It isn't just a small number of products that are seeing prices rise. Warsh stated that 54% of the 199 individual components of the PCE had price increases of more than 3% over the past 12 months. The average over the two decades before the COVID-19 pandemic was 32%.

Although Warsh didn't specifically point out the impact that the Iran war is having on energy prices, he alluded to it. The Fed chair said, "The recent rise in commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks."

The connection between Warsh's warning and the 2027 Social Security COLA

Did Warsh's speech at Jackson Hole mention Social Security? No, not even once. However, his warning about the underlying inflation trend is directly connected to the 2027 Social Security COLA.

Annual Social Security benefit increases are set based on inflation numbers. Specifically, the Social Security Administration (SSA) calculates the percentage difference between the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year and the same period in the previous year to determine the COLA amount for the next year.

When inflation is lower, the Social Security COLA is lower -- and vice versa. So when the Fed chair expresses concerns about persistent inflation, that's a pretty good hint that the next COLA could be higher.

To be sure, Warsh didn't directly warn that inflation would worsen. However, he didn't sound confident at all that inflation will decline going forward without Federal Reserve intervention. Unsurprisingly, the odds of a Fed rate hike (which would help lower inflation) have risen, with CME Group's (NASDAQ:CME) FedWatch putting the probability of a rate increase in the FOMC's September meeting at 56.9%.

Don't trust the downward revisions.

But haven't experts' projections for the 2027 Social Security COLA fallen over the last month or two? Yes, but don't trust those downward revisions. They were based primarily on lower-than-expected inflation figures driven by declining oil prices. However, oil prices have since bounced back somewhat.

Additionally, tensions between the U.S. and Iran have intensified. The U.S. mounted military attacks on Iran last weekend for the first time in over a month. Iran responded by firing missiles at Jordan, an ally of the U.S.

Warsh was absolutely right in his speech last week that a rise in commodity prices "bears watching." You can bet that the Fed will be closely monitoring oil prices and their impact on overall inflation.

Social Security recipients might be interested in watching them, too: They could directly impact how much Social Security benefits rise next year. The 2027 COLA could very well be the highest increase in several years.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.