Kathryn Anne Edwards, a labor economist and Bloomberg Opinion columnist, argues that the US economy is currently engaged in an "affordability war" on multiple fronts. She draws parallels between the current economic climate and the mid-2000s, highlighting persistent challenges that are making it difficult for average Americans to maintain their purchasing power. This sentiment is reinforced by recent data indicating that affordability is the primary concern for voters in battleground states heading into the midterm elections.
Despite some fluctuations, inflation remains a significant issue, with the personal consumption expenditures (PCE) price index rising 3.7% in July compared to a year prior, holding steady from June. Core inflation, excluding volatile food and energy, was also unchanged at 3.3% in July. These figures are noticeably above the Federal Reserve's 2% target. The ongoing Iran conflict and President Trump's threats of new tariffs on Canada and China are contributing to elevated prices, particularly for gas, which ticked up to $4.10 per gallon nationally in late August.
While consumer spending was robust in the April-June quarter, inflation-adjusted incomes have risen only 0.2% over the last year, following several months of decline. This erosion of income, coupled with rising costs for services like healthcare, utilities, and financial advice, means many Americans still feel the pinch despite inflation cooling from its 2022 highs of over 7%. The Commerce Department plans to adjust how some service costs are calculated, which could reduce annual PCE inflation by approximately 0.2 percentage points starting next month.
Edwards also points to a mismatch in housing affordability, stating that the problem is not solely about insufficient supply but also about demand driven by income inequality. Soaring income growth at the top and stagnant growth in the middle have exacerbated this issue. Overall, the persistent high cost of living, including groceries and gas, is shaping up to be a defining issue for voters and a challenge for policymakers like new Fed Chair Kevin Warsh, who is grappling with how to address stubbornly high prices and their impact on long-term interest rates.
