Affordability Crisis

1. The Affordability Crisis and Stagflation Risk

The Trump administration's tariff regime has produced the largest U.S. tax increase as a percentage of GDP since 1993, amounting to an average additional tax burden of $1,500 per household in 2026 ¹. The Yale Budget Lab found that new tariffs raised $194.8 billion in customs revenue above baseline through January 2026, with the effective tariff rate reaching 9.9% in December 2025 - the highest since 1947 ². Prices followed: imported core goods prices rose 1.3% during 2025, with 40-76% pass-through of tariff costs to consumers ². Motor vehicle prices have risen approximately 8.4% under the full tariff regime, adding roughly $4,000 to the price of an average new car ³.

The Supreme Court struck down IEEPA-based tariffs in February 2026 (Learning Resources, Inc. v. Trump), but the administration responded with new Section 122 tariffs at 10% on $1.2 trillion worth of imports ¹. And prices aren't even the worst of it: manufacturing lost 77,000 jobs from April to December 2025 - the opposite of the reshoring Trump promised ⁴. Job growth in 2025 was the weakest outside a recession since 2003, with only 181,000 jobs added for the full year compared to nearly 1.5 million in 2024 ⁴. J.P. Morgan has warned of recession risk, projecting that tariff-driven business sentiment decline will weigh directly on spending and hiring ⁵.

The macro picture is now converging on stagflation. The BEA's second estimate for Q4 2025 GDP (released March 13) revised growth sharply downward to 0.7% annualized, from an initial 1.4% advance estimate - partly reflecting the October-November government shutdown, which subtracted roughly one percentage point from the quarter ¹³⁰. The February CPI (released March 11) showed headline inflation at 2.4% annual and core at 2.5%, with food at home up 3.1% year-over-year - but this data was collected before the Iran war began and does not yet reflect the energy shock ¹³¹. The PCE price index for Q4 came in at 2.9%, well above the Fed's 2% target ¹³⁰. Goldman Sachs raised its 12-month recession probability to 25% on March 12 (up from 20%), raised its year-end PCE inflation forecast to 2.9%, and pushed expected rate cuts to September and December; the bank estimated that tariffs alone have added more than 70 basis points to core inflation ¹³². Deutsche Bank warned that each day the Strait of Hormuz remains closed increases the risk of a broader stagflationary shock ¹³³. The University of Michigan consumer sentiment index fell to 55.5 in March (preliminary, March 13) - the 2nd percentile in the survey's history - with personal finance expectations down 7.5% across all income groups, ages, and political affiliations; year-ahead inflation expectations stalled at 3.4% after six months of declines ¹³⁴. Interviews conducted after the Iran war began showed sharply lower sentiment than those completed before, erasing all pre-war gains.

The political dimension: 65% of Americans say Trump's policies have worsened economic conditions - the highest of his presidency and higher than any equivalent figure during the Biden administration (CNN/SSRS, Tier 2, late March 2026) ¹⁸⁰. Trump's economy approval has fallen to a career low of 31%, down 8 points since January, with Republican economic approval down 14 points over the same period ¹⁸⁰. Inflation approval sits at 27%, down from 44% a year ago. Three-quarters say the economy is in poor shape, with 6 in 10 expecting it to remain poor a year from now - the highest in either Trump presidency. Seven in 10 say the president lacks a clear plan for gas prices ¹⁸⁰. The convergence of 0.7% GDP growth, 2.8% PCE inflation, 4.4% unemployment, and consumer sentiment in the bottom 2% of its historical range is the specific combination that economists define as stagflation. The war's energy shock is now transmitting directly into food production costs: USDA's March 31 Prospective Plantings report confirmed corn acreage falling to 95.3 million (down 3.5% from 2025's near-record 98.8 million), with soybeans rising to 84.7 million (+4%), as farmers shift away from nitrogen-intensive crops due to surging fertilizer costs driven by the war. Historically, stagflation environments produce the largest midterm swings against the incumbent party - and this one arrives with groceries, cars, insurance, and gas all visibly more expensive than they were a year ago.