The Real Roots Of America’s Affordability Problem

Egg prices have become a symbol of the affordability debate, even as inflation has eased.Getty ImagesAmericans have spent the better part of the last four years navigating a changing cost-of-living landscape. The pandemic shock gave way to the fastest inflation in four decades. And while that episode has largely passed, the current public mood still harbors deep resentment about rising prices. Commentators are calling it an affordability crisis. Politicians insist they have the cure. Yet the debate suffers from a muddled understanding of what “affordability” even means, and the resulting policy conversation often chases the wrong targets.Prices rose sharply from 2020 through 2023, forcing a collective reevaluation of what everyday life costs. Even now, with inflation settling back closer to the Federal Reserve’s 2 percent target, many households still feel as though they are pinching pennies. The president has dismissed concerns as political posturing, but the public’s anxiety suggests something real is happening. Once a higher price level becomes entrenched, families must adjust to it, whether or not their expenses keep rising. The Biden administration oversaw the inflation, and the second Trump administration is now presiding over the adjustment. Economic conditions are improving, yet the sense of strain has been slow to fade.How the Administration Frames AffordabilitySome confusion seems to stem from how one defines affordability. Some in the Trump administration speak as if affordability and inflation are interchangeable terms. By that definition, there is genuine improvement in affordability. The inflation rate is lower than during the Biden period, when 8 or 9 percent readings were common. Today, the measured rate hovers around 3 percent and occasionally slips below that. The worst of the inflation is indeed over for now. But the level of prices is what shapes people’s lived experience, and the level remains markedly higher than before. This has psychological repercussions if nothing else.For roughly eighteen months, nominal wage growth in many sectors has outpaced inflation modestly, allowing workers to claw back some of the purchasing power they lost during the initial inflation shock. However, this growth may be moderating. Moreover, wage catch-up is gradual. Even when real income trends are positive, people may feel stuck because they are still catching up to the higher price level, which greets them every time they open their wallet. There is also the problem of measurement. If productivity is overstated or inflation understated, the rebound in real wages may be illusory.The Limits of Targeted PoliciesInflation refers to a broad, sustained rise in prices. Once that happens, the entire price structure of the economy ratchets up. Prices of groceries, rents, services, and goods all move to a higher baseline. Getting back to the old baseline is not as simple as bringing inflation down. It would require active deflation, a general fall in prices. But deflation is something policymakers tend to avoid, since falling prices can lead to business failures, rising unemployment, and debt burdens that become harder to service.MORE FOR YOUThis leaves households in an uncomfortable position. The rapid run-up in prices since 2020 created a new, higher price level, and that level is unlikely to be reversed. The pre-inflation world is gone, but the adjustment to the new one is proving psychologically difficult. Families feel the difference every time they look at the cost of groceries or rent. This creates a trap for politicians that promise to fix affordability. If part of the problem is psychological, then no policy aimed at influencing specific prices may make people feel any better. A rule change that boosts egg production might lower egg prices a bit. Adjusting grazing rules or speeding up beef processing could offer similar, modest relief. But these are one-time, sector-specific level changes. They do not reset the broader price level or meaningfully influence the inflation trend.The same logic applies to policies often criticized for worsening affordability. Tariffs, for example, may tend to push certain prices up, but they rarely shift the underlying inflation trajectory. Their effect on the inflation rate is brief. Reversing tariffs might therefore produce some temporary relief, yet if overall inflation stays elevated, any gains will soon be overtaken by other forces.Why Macroeconomic Levers Fall ShortThe natural place to look next is macroeconomic policy. Classic economics would point to monetary tightening as the primary tool for suppressing price pressures. But the Federal Reserve is not preparing to tighten. Instead, officials are easing by lowering interest rates. Moreover, the Fed seems to have other priorities besides affordability. It’s current operating framework, what it calls “reserve management purchases,” relies on buying short-term Treasury bills and swapping them for interest-bearing reserves. In such a system, traditional monetary policy has limited force, since the Fed is mostly exchanging one interest-bearing government liability for another.This leaves fiscal policy as the remaining lever. When deficits are large and rising, and when debt accumulates faster than national income, the price level can absorb part of the adjustment. Slowing the pace of new bond issuance, and reducing it over time, would help anchor long-term price stability. A credible plan to shrink the structural deficit would therefore help stabilize expectations and, in turn, prices.But serious deficit reduction is politically elusive. Elon Musk’s Department of Government Efficiency struggled to identify meaningful spending cuts. Lawmakers recoil from the tradeoffs required to put the nation on a sustainable fiscal path. And while the public demands greater affordability, most Americans resist the kinds of hard policies that would make room for it.Furthermore, even if deficit discipline were achieved, the link between inflation and wages complicates matters. Wages tend to move with prices over time. So bringing inflation lower places pressure on nominal wage growth. That is why the recent period is somewhat puzzling. Inflation rose sharply, but wages rose as well. Some complaints reflect the lagged adjustment inherent in labor markets. Some may reflect measurement noise or the differing experiences of different sectors or industries. For many families, however, perception may be the essence of the affordability problem. They recall the pre-inflation world vividly, and the new baseline has yet to feel normal.Productivity Is The Missing IngredientTo the extent wages still lag behind the higher price level, the biggest issue may be productivity. Stagnant productivity growth holds down wages, and the public sector plays a quiet role in that process. When government spending expands, the economy often ends up using more inputs to produce a given amount of output. A government that spends less and allocates its spending more efficiently can therefore raise productivity across the economy and, indirectly, ease affordability pressures through stronger wage growth. Reduced federal spending has the added benefit of narrowing the deficit.But none of this is easy. The average American does not naturally connect federal spending levels with the price of groceries, so any proposal to cut spending will tend to sound abstract or irrelevant, undermining support. Every program also has a constituency. Cutting spending to boost productivity requires a willingness to resist these short-term political pressures. Washington has shown little appetite for that kind of discipline in recent years.A Likely Turn Toward Micro-Level ReformSince macro-level solutions may be off the table, the policy menu will likely continue to gravitate toward targeted interventions. In this domain, deregulation often performs better than alternatives such as subsidies. Permitting reform stands out as one viable option. Lengthy and unpredictable review processes suppress investment in infrastructure, energy, and housing, putting upward pressure on prices. Streamlining these processes would boost supply and lower costs in ways that benefit many industries at once.The administration’s energy initiatives also seem useful. Gasoline prices have slipped from their peaks, and although many factors contribute to this, regulatory changes and faster leasing approvals have likely played a role. Lower fuel costs feed into transportation expenses and, in turn, into the costs faced by a wide range of industries. Those savings eventually filter into retail prices more broadly.Housing and child care remain tougher cases for the federal government to address because they are shaped by state and local policy. Still, the administration can encourage reform by tying federal funding to local changes. Federal grants can be conditioned on loosening zoning rules or permitting higher-density development. This kind of supply-side approach is more promising than subsidies that stimulate demand. Demand-side interventions often raise prices by bidding scarce resources away from other uses. This may help some particular families, but it does little to improve affordability systemwide.Resetting ExpectationsA once-in-a-generation price shock leaves scars that fade only slowly. Wages take time to adjust. The adjustment is painful. And on top of that, public sentiment does not always align with the facts on the ground.For now, targeted deregulation and other modest supply-side reforms may be the most pragmatic solutions available. They will not bring back the old price level, but they can prevent new cost pressures from arising and lower prices in specific markets. More comprehensive solutions exist, but they are unlikely to attract broad political support.As a result, voters will keep asking why life feels expensive, and politicians will keep offering assurances. But their ability to deliver sweeping relief is constrained by political realities. Policy responses will therefore continue to target symptoms, rather than the deeper structural causes of the affordability issue.