Two Forces Driving the 2027 Forecast

The first driver is a familiar one: tariffs. Even after the original April 2025 tariffs were overturned, the administration has continued imposing new duties under different legal justifications, including a fresh round of tariffs ranging from roughly 10% to 12.5% on more than 80 countries. Added import duties tend to raise costs for U.S. manufacturers, and those costs get passed along to consumers, keeping prices stickier than they would otherwise be.

The second, and by far more significant, driver is geopolitical. In late February 2026, President Trump authorized military strikes against Iran. In response, Iran moved to close the Strait of Hormuz to most maritime traffic — a chokepoint through which roughly a fifth of the world’s petroleum liquids normally flow.

The disruption triggered one of the more significant modern energy supply shocks, sending fuel prices sharply higher through the spring. By May 2026, headline CPI inflation had climbed to 4.2%, its highest level since April 2023, with core inflation (which strips out food and energy) also climbing to its highest point since September 2025.

That spring spike is what initially pushed some 2027 COLA forecasts as high as 4.7%. Since then, however, the picture has moderated somewhat. The most recent Bureau of Labor Statistics data, covering July 2026, shows headline CPI cooling to 3.4% year-over-year, with core inflation easing to 2.5% — its lowest reading since March 2021. Energy-driven price pressure appears to be losing some momentum, even though overall inflation remains well above the Federal Reserve’s 2% target.