The U.S. Cost of Living: Inflation, Interest Rates, and the Persistence of Household Strain

Introduction: Disinflation Without Relief

Headline inflation has decelerated substantially from its post-pandemic peak, monetary policy has shifted from aggressive tightening toward cautious easing, and aggregate growth remains positive. Yet public dissatisfaction with the cost of living remains pronounced. Surveys show consumer confidence at multi-year lows, while polling consistently indicates that households perceive affordability to be worse than at any point in recent memory.

This apparent contradiction—between improving macro indicators and persistent household stress—lies at the heart of today’s cost-of-living debate. Understanding it requires disentangling disinflation from deflation, price levels from price growth, and aggregate outcomes from distributional realities. It also requires recognizing that monetary policy, trade policy, and structural supply constraints operate on different time horizons and affect households asymmetrically.

Inflation Dynamics: Slower Price Growth, Higher Price Levels

The chart above illustrates the trajectory of U.S. consumer price inflation since 2000. The pandemic-era surge—peaking above 9%—represented the sharpest inflationary episode in four decades. That spike has since unwound. By late 2025, headline CPI inflation stood near 3%, well below its peak and closer to historical norms, but yet trapped between 2% and 4% and still above the Federal Reserve’s 2% target.

Critically, this represents disinflation, not falling prices. While the rate of increase has slowed, the price level is permanently higher. Cumulatively, consumer prices have risen roughly 25% over the past five years. For households, especially those with limited wage bargaining power or fixed nominal incomes, this level shift is what dominates lived experience.

This distinction helps explain why claims that “prices are coming down” fail to resonate. Except for a narrow set of volatile items—such as gasoline and eggs—prices across core categories continue to rise, albeit at a slower pace. Food away from home, insurance, childcare, healthcare services, and utilities have all exhibited persistent upward pressure.

Moreover, inflation has become increasingly sectorally concentrated. Goods inflation has eased, aided by supply chain normalization, while services inflation—particularly shelter—has proven more inertial. Since services comprise a larger share of consumption for middle- and lower-income households, aggregate disinflation has not translated into proportional relief.

Monetary Policy: From Restriction Toward Neutrality

The Federal Reserve’s response to the inflation surge was historically swift. Between early 2022 and mid-2023, policy rates were raised from near zero to above 5%, producing the steepest tightening cycle since the early 1980s. As shown in the second chart, rates have since edged lower, reaching approximately 3.6–3.9% following successive cuts in late 2024 and 2025.

The Fed now characterizes policy as near the upper bound of neutral—no longer actively restraining growth, but not yet accommodative. This recalibration reflects a balancing act between still-elevated inflation and a cooling labor market. Job creation has slowed, unemployment has drifted higher toward 4.4%, and continuing claims suggest longer job search durations.

However, the transmission of monetary easing to household affordability is uneven and delayed. Rate cuts primarily reduce marginal borrowing costs for new loans and floating-rate debt. For households locked into high-rate mortgages or facing rent increases unrelated to financing costs, the immediate effect is minimal. Conversely, higher-income households benefit disproportionately through asset price appreciation and lower refinancing costs, reinforcing distributional asymmetries.

The Fed’s decision to halt balance sheet reduction and resume Treasury bill purchases further supports financial market liquidity. While this stabilizes credit conditions and supports investment, it does little in the short run to alleviate cost-of-living pressures rooted in housing scarcity, labor supply constraints, or global commodity dynamics.

Housing: The Core of the Affordability Crisis

Housing represents the single largest contributor to perceived cost-of-living stress. The third chart underscores the structural nature of the problem: U.S. house prices have more than doubled over the past decade, rising by over 100% since 2015. Even after a brief correction following the 2008 financial crisis, the long-run trajectory remains sharply upward.

Shelter costs affect households through multiple channels. For renters, higher home prices translate into higher rents, often with a lag. For prospective buyers, elevated prices combined with higher mortgage rates have produced the worst affordability conditions since the early 1980s, despite recent rate cuts. Existing homeowners with fixed-rate mortgages are insulated, but this insulation reduces housing turnover, further constraining supply.

Importantly, housing inflation feeds directly into CPI through owners’ equivalent rent, which adjusts slowly. As a result, even if market rents stabilize, official inflation measures may remain elevated for an extended period. This inertia complicates monetary policy and prolongs the perception of economic strain.

Housing affordability also has profound intergenerational implications. Younger households face delayed household formation, higher debt burdens, and reduced wealth accumulation. These dynamics help explain why aggregate wage growth has failed to restore perceived economic security, even as employment remains historically strong.

Goods, Tariffs, and Sector-Specific Pressures

Beyond housing, the cost of living is shaped by a combination of global supply shocks and domestic policy choices. Grocery prices, for example, have risen modestly in aggregate but sharply for specific items such as coffee, beef, and bananas. These increases reflect a confluence of factors: climate-related supply disruptions, higher labor costs, and trade barriers.

Tariffs function as implicit consumption taxes, raising domestic prices even when intended to support domestic producers or strategic industries. While tariff revenues accrue to the government, the incidence largely falls on consumers. Empirical evidence suggests that recent tariff measures have contributed incrementally—but not insignificantly—to goods inflation, particularly in food and durable goods.

Energy prices present a more nuanced picture. Gasoline prices have declined from recent highs, providing visible but volatile relief. Electricity prices, however, have continued to rise, driven by grid investment costs, surging demand from data centers, and reduced renewable subsidies. Since utility costs are relatively inelastic, these increases disproportionately affect lower-income households.

Automobile prices further illustrate the divergence between headline inflation and lived experience. New vehicle prices have surpassed $50,000 on average, reflecting both input cost pressures and regulatory and tariff effects. Even as financing costs ease, high sticker prices keep ownership out of reach for many households.

Wages, Inequality, and Perceived Economic Reality

A central reason the cost-of-living issue persists is that nominal wage gains have not fully offset cumulative price increases for all households. While average real wages have stabilized, gains are unevenly distributed. Higher-income workers, particularly in professional and technical sectors, have seen stronger wage growth and asset appreciation. Lower-income workers, by contrast, face higher exposure to food, housing, and energy inflation.

This divergence explains why macro indicators such as GDP growth and stock market performance coexist with widespread dissatisfaction. The economy can expand at a near-potential rate while a significant share of households experience declining discretionary income.

Behavioral factors also matter. Consumers tend to anchor perceptions to price levels rather than growth rates. A grocery bill that rose sharply in 2022 and remains elevated in 2025 continues to feel burdensome, even if prices are now rising more slowly. In this sense, inflation has left a psychological scar that disinflation alone cannot erase.

Conclusion: Structural Costs and Policy Trade-Offs

The U.S. cost-of-living challenge is not primarily a cyclical phenomenon. It is the product of structural housing shortages, globalized supply chains, demographic shifts, and policy trade-offs that play out over years rather than quarters. Monetary policy has succeeded in restoring price stability momentum, but it cannot reverse past price level increases or resolve sector-specific supply constraints.

Looking ahead, further rate cuts may support employment and ease financing costs, but meaningful affordability gains will require complementary structural reforms—particularly in housing supply, infrastructure investment, and labor market participation. Absent such measures, the economy may continue to exhibit the paradox now defining the post-pandemic era: macroeconomic resilience alongside microeconomic strain.

For households, the cost-of-living debate is less about whether inflation is falling and more about whether economic progress feels tangible. Until price levels stabilize relative to incomes across essential categories—especially housing—that gap between economic statistics and lived experience is likely to persist.

Sources & References

BBC. (2025). Trump hits the road to sell economic message and counter cost of living concerns. https://www.bbc.com/news/articles/c04vqyl13rlo 

BBC. (2025). Trump vows to make US affordable again, as Americans feel the pinch. https://www.bbc.com/news/articles/ckgl63lrpkmo 

Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [DFF], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DFF , December 15, 2025.

US Bank. (2025). Federal Reserve calibrates interest rate policy amid softer hiring and lingering inflation. https://www.usbank.com/investing/financial-perspectives/market-news/federal-reserve-tapering-asset-purchases.html 

US Bank. (2025). Federal Reserve cuts interest rates 0.25% and increases growth projections for 2026. https://www.usbank.com/investing/financial-perspectives/market-news/federal-reserve-interest-rate.html 

U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL, December 15, 2025.

U.S. Federal Housing Finance Agency, All-Transactions House Price Index for the United States [USSTHPI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USSTHPI, December 15, 2025.