The truth about affordability

swill, PARASOCIAL and passion lure were contenders for word of the yr in 2025. In 2026 an early favourite for that title, at least among pollsters and election strategists, is “affordability”, often paired with the word “crisis”. Having at last found a slogan that seems to work against the spell of Trumpism, Democrats will talk of little else between now and the midterms in November. In Europe, which is better at reposting American memes than coming up with fresh ones, there is talk of a cost-of-living crisis. A transatlantic consensus is forming that prices are out of whack. But are they?

Affordability is a fuzzy term that can mean whatever feels true. Telling people to stop complaining and be happy with their lot—the Marie Antoinette strategy—is not working for a White House where the tone and decor increasingly resemble Versailles. Maddeningly, voters want contradictory things: low prices when they shop, high wages for themselves; not many immigrants but lots of cheap labour; rising house prices when they own and lower ones when their children want to buy.

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Successful economies are filled with tensions like these. Politicians will naturally say what polls well to win elections. If the only downside of the affordability story were that voters punished incumbents for high prices, that would not be so bad. Yet if the problem is misdiagnosed, the risk is greater that harmful policies will be introduced to “fix” it.

That is because talk of an affordability crisis mixes phantom concerns with real ones. Start with the imagined problems. People are sensitive to the prices of things they buy all the time. A gallon of milk cost $3 in American stores in January 2019 and now costs $4. Food prices have shot up in Europe too, as have energy prices. However, wages are growing faster than prices up and down the income spectrum on both sides of the Atlantic. In this sense there is no affordability crisis. Besides, nobody should really want prices to return to 2019 levels. If that were the goal, policymakers should seek to imitate Greece after its debt crisis, when it suffered depression and deflation.

There is more to the affordability story than the price of milk or electricity, though. As societies grow richer, the share of spending on goods shrinks and spending on services increases. When Donald Trump was born, 60% of America’s household consumption went on goods. Now the share is below 40%, while that spent on services has risen. Many people have forgotten how long their parents once had to save to buy a tv, and so do not appreciate the globalised supply chains that have made goods so much better and cheaper.

Meanwhile they are shocked by how expensive a haircut is now, let alone child care. Although both goods and services are included in inflation numbers, services remain stubbornly resistant to the huge productivity gains seen in manufacturing. In the euro zone the affordability conundrum in services presents itself in a different way. Because the prices of services such as health care and home rental are more regulated, the problem is availability more than affordability, and it is often solved by queuing—which does not feel good, either.

That is the first true affordability problem. The second is that though real wages have indeed risen, they have not gone up as fast as assets have. The wealth-to-GDP ratio is close to an all-time high in America. To think through the effects of this, picture two people who earn identical salaries that place them in the top 10% of earners. They have a standard of living that robber barons or monarchs of a bygone era would envy.

Then imagine one of these people also inherited $1m ten years ago. Had this lucky one put the money in the S&P 500, they would now be sitting on $4m. When these two people want to buy a car or a phone, this is not a problem. Ford or Apple can make an additional unit and sell it at the same price. When they want to buy positional goods, such as an apartment in San Francisco with a nice view, they are in competition. For one of them, this feels like an affordability crisis.

These are fundamentally problems of affluence, not of economic malaise. That makes them tough for policymakers to solve. To bring down the prices of housing and energy, for example, governments need to make it easier to build more homes and wind farms. Almost everyone favours this—but only in someone else’s backyard. Prices of services in America are inflated by absurd occupational-licensing rules—which licenced florists and hairdressers fiercely defend. Lowering tariffs would slow inflation, but firms protected by tariffs lobby strenuously for their preservation.

Enacting sensible policies is hard and even countercultural in a world that has, at America’s insistence, turned against free markets and international trade. The danger is that politicians reach for pseudo-fixes that make things worse, such as price controls. Also, in 2026 the American economy will see a fiscal boost from tax cuts, and the Fed will be under political pressure to cut interest rates. President Trump proposes sending out $2,000 cheques to taxpayers, funded by revenue from tariffs. It is hard to think of a combination of policies better designed to raise prices than to place new taxes on imports and then give people free money with which to buy them. It seems that the economic lessons that were learned in the 1970s, when Richard Nixon introduced price controls—and then abandoned them—must be relearned. That could be painful.

Sticky thinking

Once stories about the economy take hold they can be hard to shift. For the past decade America has told itself one about how blue-collar workers were left behind by coastal elites and then rose up in a populist rebellion. The data say this is not true: the real wages of non-college-educated workers were rising in 2016, when Mr Trump was first elected. They have kept rising since. Yet this tale has been used to justify an array of self-harming economic policies. The affordability crisis could become another story which, repeated often enough, is accepted as truthy—facts be damned. That makes it a trap.

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