The affordability squeeze has consumers gloomy

Many Americans are deeply unhappy with their financial situation, and with good reason. They are grappling with a serious affordability squeeze.

Prices for many things, from groceries to car insurance, are high and continue to climb. Meanwhile, pay increases are slowing as job growth has stalled and unemployment is on the rise.

Americans’ unease with their finances is apparent in the long-running University of Michigan survey of consumer sentiment. This survey of consumers’ financial well-being has been conducted monthly since the early 1950s, and in the past few weeks, the responses have been about as weak as ever.

The survey likely overstates consumers’ collective gloominess, as political biases are increasingly shaping people’s feelings about almost everything, including their finances. Democrats have been more glum than Republicans since President Donald Trump’s election, whereas the opposite was true under President Joe Biden. Even so, the survey results send a loud and clear message.

The angst over affordability was also front and center in the recent election results. The cost of living was far and away the top concern of voters in New York City’s mayoral race, and in the governors’ races in New Jersey and Virginia. The high and rising cost of electricity, healthcare, and housing were especially prominent in voters’ decisions.

The affordability squeeze has been a long time in the making.

Prices jumped during the COVID-19 pandemic, as global supply chains and labor markets were upended. Then, the Russian invasion of Ukraine drove up food prices, and at the height of the economic fallout from that war, the cost of a gallon of gasoline reached a record $5 in some U.S. locations.

Consider the increases in consumer prices for some basic necessities since the pandemic. Healthcare costs are up by 16%, childcare by 18%, groceries and rent by 28%, used cars by 30%, electricity by 34%, and car maintenance by 41%.

Overall, prices across all goods and services are up by 24%, just about double what the Federal Reserve deems as optimal inflation.

Adding to Americans’ financial pain, the Fed aggressively raised interest rates in an effort to slow the economy down and rein in the high inflation. This exacerbated the affordability squeeze, particularly with the cost of homeownership.

Prior to the pandemic, the typical monthly mortgage payment was no more $1,000. Once the Fed had finished increasing rates, the monthly payment was well over $2,000. Homeownership, a key part of Americans’ definition of financial success, is completely out of reach for most.

Despite all of this, it did appear, coming into this year, that the worst of the affordability squeeze had passed. Inflation was quickly receding and headed back toward the Fed’s inflation target. Fed officials were so confident in this forecast that they began cutting interest rates.

But, alas, the forecast was wrong. The Trump administration’s higher tariffs, highly restrictive immigration policy, and broader de-globalization efforts have upended that outlook.

De-globalization scrambles global supply chains, which raises costs, reduces competition, weakens productivity growth, and leads to labor shortages. Inflation now appears set to remain uncomfortably high for the foreseeable future. The affordability squeeze is intensifying again, leading to renewed anguish among consumers and voters.

De-globalization is also weighing heavily on the job market and incomes, adding to the country’s affordability woes. Job growth has come to a virtual standstill, as businesses, unsure of how the tariffs and other policies will play out, enact hiring freezes. They aren’t all laying off workers — that would be a recession — but they’ve done everything but.

Unemployment remains low, but it is steadily increasing, particularly for younger workers seeking new employment opportunities. Wage growth is thus throttling back.

The upcoming cuts to federal government benefits for lower-income households, included as part of the One Big Beautiful Bill Act, will worsen the affordability problem. Tax subsidies to help pay for the cost of health insurance under the Affordable Care Act have been scaled back, and cuts to the Medicaid program and SNAP, the food assistance program, are looming. As these programs are cut back, the cost of living for families reliant on them will increase.

Congress appears to have taken the election results to heart and seems to be focused on ways to ease the affordability squeeze. Lawmakers are holding hearings on how to reduce the financial burden on Americans from electricity, food, healthcare, and housing costs. But this won’t be easy, as there are no slam-dunk legislative solutions.

Trump has proposed providing a $2,000 stimulus check to families with an annual income of less than $100,000 — similar to the checks sent during the pandemic. Of course, like then, this might merely provide temporary financial relief, as it boosts consumer spending, pumps up inflation, and ultimately worsens the affordability squeeze.

The quickest way to address the affordability squeeze is to relax tariffs and immigration policies. The president has taken this approach on a case-by-case basis, reducing tariffs on bananas, beef, and coffee, and halting some ICE raids on agricultural workplaces that heavily rely on immigrant workers.

However, it remains to be seen if he will further backtrack on his signature economic policies. If not, the affordability squeeze and the tough financial times facing many Americans are sure to persist.