February 27, 2026
Almost everything we buy these days is less affordable than it was prior to the 2020 recession. The prices of almost everything have risen more quickly than our income. Between the increase in mortgage rates and skyrocketing home prices in the past five years, many median-income earning families can no longer afford to purchase a median-priced home. The CPI includes a large basket of goods and services that consumers buy routinely every month. The dramatic increase in inflation between 2020 and mid-2022 was supposed to be “temporary” which meant that prices would rise for a short period of time but then decline. That did not happen. Prices rose sharply but never fell. They simply rose more slowly. The initial surge in prices became entrenched. Everything became more expensive. Consumers have noticed and are justifiably complaining.
With respected to housing the National Association of Realtors provides a monthly measure of housing affordability. The index is based on three factors – the price of a home, mortgage rates, and consumer income. Prior to the 2020 recession, a median-income family had about 60% more income than required to purchase a median-priced home.
But mortgage rates subsequently rose from 3.0% to more than 6.0%, and home prices climbed by 50% in a short period of time. Down payments and monthly payments skyrocketed and affordability plunged, That same middle-income family today has barely enough income to qualify for the mortgage on a median-priced home.
If we are right that if this year the inflation rate slows a bit mortgage rates could decline to perhaps 5.7% by yearend. Housing has become so unaffordable that prices may edge lower. And if the economy continues to crank out jobs and wages climb income should rise. All three of those factors will boost housing affordability which will lift home sales, but it will not recreate the vibrant housing market that existed prior to the recession. Better, but still not great.
When consumers express their discontent with inflation they typically cite their favorite item that has jumped in price. In the food category they typically talk about the price of beef or coffee. A year or so ago eggs were at the top of the list. Others complain about the price of a new car, automobile insurance, or car repairs. Those are legitimate examples, but not all of the 300 or so items in the CPI have risen quite as dramatically. The only fair way to examine the issue it to look at the index as a whole.
The 2020 recession was very brief. It lasted only two months. The Fed cut rates by 2.5 percentage points. Firms rapidly rehired many of the workers they had laid off just months earlier. The economy came roaring back. GDP growth in the third quarter of 2020 was a breathtaking 35%. Firms were unable to boost production rapidly enough to keep pace with demand. Shortages developed. The Fed made the problem worse by flooding the system with liquidity. Inflation soared. It peaked at 9.0% in mid-2022.
The Fed kept insisting that the run-up in inflation would be temporary. But inflation is the rate of growth of prices which slowed from 9.0% to about 2.5%. In that sense the Fed was right. The inflation rate slowed.
But to an economist or a consumer “temporary” means that prices rise for a short while and then decline and eventually return to a price close to where they started. That is why economists exclude food and energy prices from the calculation of the CPI. Those prices are extremely volatile and if included will distort the underlying rate of inflation. Food prices can rise or fall quickly as the result of unusually cold or warm weather, snowstorms, or droughts. Ditto for energy prices. OPEC might choose to raise or cut production, a refinery fire or a hurricane in the Gulf of Mexico could temporarily curtail production. Prices might rise or fall sharply for a month or so, but then reverse direction shortly thereafter. They end up roughly in line with where they started.
That was not the case in 2020. Prices rose sharply but never declined. They continued to climb but at a slower pace. In the past five years the CPI has risen 25% or about 5.0% per year. The Fed targets inflation at 2.0% per year. It missed by a wide margin. No wonder consumers are complaining. That excessively high rate of inflation eroded their purchasing power. The red line is where the CPI would have been if the Fed had hit its 2.0% inflation target every year. The CPI is still 15% higher than that which suggests that consumer purchasing power has been reduced by 15% in the past five years.
The point of all this is that consumers have a legitimate complaint about rising prices in recent years. The CPI has slowed to 2.6%. We expect it to slow further to 2.2% by the end of this year. After years of missing the mark, the Fed is finally getting close to its inflation target. Its about time.
Stephen Slifer
NumberNomics
Charleston, S.C.
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