Siddharth Bellam, Stanford University
Inflation is cooling, and by most macroeconomic measures, the United States appears to have avoided a recession. The Federal Reserve’s December 2025 projections place PCE inflation at 2.5 percent for 2026, a slight improvement from the 2.6 percent forecast issued just three months earlier. Unemployment has also remained relatively contained. For policymakers, these figures amount to vindication. For a large share of American households, however, they mean very little.
The problem lies in the distinction between an inflation rate and a price level. Disinflation means that prices are rising more slowly; it does not mean that prices have fallen. Consumer prices remain roughly 25 percent higher than they were in January 2020, more than double the cumulative inflation of the five years before the pandemic. Although the annual rate of increase has eased, a family paying substantially more for groceries, rent, utilities, and child care than it did five years ago does not experience that shift as the relief that policymakers claim it to be. The burden is not simply that prices rose quickly, but rather that they rose and stayed there. That is what makes the rhetoric of a soft landing so politically convenient yet economically incomplete: it emphasizes that price increases have slowed, while obscuring the financial strain caused by the prices already in place.
That omission matters all the more because many middle-class households already experienced strain before the pandemic repriced basic necessities. Research from the Brookings Institution found that one-third of middle-class families cannot afford essentials such as food, housing, transportation, child care, and health care. Moreover, in each of the 160 major metropolitan areas analyzed, at least 20 percent of even middle-class earners could not afford basic necessities in their own metro area. Those figures, drawn from 2023 and therefore preceding current tariff-related price pressures, describe a baseline of fragility that the inflation surge did not create but undeniably worsened. When families cannot cover basic expenses, they are more likely to rely on debt and are less able to build savings to cushion an unexpected layoff, medical bill, or repair. For many, the inflation shock of 2021 and 2022 was less of a temporary disruption than a lasting weakening of their standard of living.
When household income no longer covers basic expenses, borrowing fills the gap. Credit, however, remains costly. Even as inflation has eased, the Federal Reserve has indicated that interest rates are likely to decline only gradually, which would keep consumer credit expensive. As interest compounds and minimum payments consume a growing share of monthly income, households’ capacity to absorb further shocks continues to erode. The Federal Reserve’s November 2025 Financial Stability Report found that credit card delinquency rates, after reaching their highest level since 2010 in 2024, remained elevated through the first half of 2025 above their long-term median, with the overall increase driven primarily by borrowers with nonprime credit scores, though the subsequent stabilization has been broad-based across credit score and income groups. By the third quarter of 2025, total household debt stood at a record $18.59 trillion, while 4.5 percent of outstanding balances were in some stage of delinquency. Although delinquency rates may have stabilized in the technical sense, stabilization at historically high levels does not necessarily equate to recovery. It only means that financial distress has stopped worsening as rapidly, not that it has materially receded. Aggregate credit data can therefore conceal a more troubling reality: it is likely that many households avoid missed payments only because they have taken on more debt to do so.
Furthermore, recent policy changes threaten to deepen that strain by removing some of the supports that keep temporary hardship from becoming permanent damage. The Congressional Budget Office projects that expanded work requirements and tighter eligibility rules under the One Big Beautiful Bill Act will ultimately cause around 5 million people to lose health insurance and more than 2 million to lose SNAP benefits in a typical month. When health coverage disappears, medical costs are pushed onto savings or credit lines that are already depleted. Subsequently, if food assistance is reduced, already narrow household margins become more fragile, such that a missed paycheck or an unexpected expense can quickly become a crisis. Although these changes are often framed as modest spending restraint, cuts of this scale could ensure that ordinary shocks cascade into debt crises for families with no remaining cushion.
At the same time, there is no guarantee that disinflation will continue. The Peterson Institute for International Economics has argued that inflation could exceed 4 percent by the end of 2026, driven by the delayed effects of tariffs on consumer prices, a fiscal deficit that could surpass 7 percent of GDP, a tighter labor supply resulting from changes in immigration policy, and financial conditions that remain more accommodative than the Federal Reserve recognizes. On the financial side, elevated asset prices, tight credit spreads, and a weakening dollar continue to ease borrowing and spending even as the Fed maintains a restrictive stance. On the tariff side, much of the burden so far has been absorbed by importers drawing down inventories accumulated before the tariffs took effect. That absorption is temporary. Once those stockpiles are exhausted, importers will face higher input costs that they are likely to pass on to retailers, who in turn will raise shelf prices for consumers. The result would be a second wave of price increases layered on top of a cost of living that is already 25 percent above the pre-pandemic level. If that occurs while cuts to health insurance and SNAP benefits are already taking effect, households that have spent several years managing higher costs with shrinking buffers will face another serious blow. Higher inflation would also force the Federal Reserve to keep interest rates elevated for longer, since returning inflation from above 4 percent back toward its 2 percent target would require sustaining restrictive monetary policy well beyond current market expectations, compounding the borrowing costs already weighing on heavily indebted families.
The economy may have avoided a recession. However, it has not restored the affordability that once defined middle-class stability. Housing, food, health care, child care, and debt payments now consume a share of household income that, for a significant portion of the middle class, threatens budget sustainability. Slower inflation does not alter that reality. It means households bear a greater burden, just one that accumulates more gradually.