High prices have turned Americans against the economy, and they’re starting to unleash real consequences for Washington and the financial markets.
Historic inflation led voters to oust Democrats from the White House in the 2024 election. Persistent high prices and a return of inflation have given President Donald Trump low approval ratings, and it’s threatening to turn Congress Democratic in November’s midterm elections.
So you’d think America’s politicians would do everything in their power to get prices under control. Yet they keep doing the exact opposite.
The one thing that seems to unite the left and the right nowadays is populist economics. But those policies that fuel inflation – including massive spending and tariffs – are very hard habits to kick. And on the opposite side of the same coin, the solutions to inflation – spending reductions and higher taxes – are massively unpopular and could hurt the economy in the short run.
That’s part of the reason why the bond market is in turmoil, with Treasury yields surging in recent months and, in particular, over the past couple weeks.
Bond investors know Washington can’t solve the underlying inflation problem, and they’re demanding a higher yield to compensate them for the growing risk that their investments will be devalued over time by rising prices.
High bond yields are driving interest rates higher on consumer loans that are pegged to Treasuries, including mortgage rates. So, unless Washington is prepared to take serious action on prices (and there’s no indication it is), get used to this new era of uncomfortably high inflation – and interest rates.
The Marriner S. Eccles Federal Reserve building in Washington, DC, on April 17. Alex Wroblewski
The policy consequences
America’s $31 trillion economy is too big and diversified for politics to break. But fiscal policy can help speed it up or slow it down.
Right now, the White House and Congress are aligned: They’re speeding it up. The One Big Beautiful Bill Act last year lowered taxes and increased spending. The war in Iran has also cost many billions of dollars.
The consequences of some of those policies aren’t all bad: Unemployment is low, the stock market is near record highs, home prices are rising, and consumer spending is up – particularly from wealthy Americans with mortgages and money in the market. Business spending is stronger than ever, particularly from the tech sector, which is spending $1 trillion this year on AI infrastructure.
But they’re not all good, either. Oil prices, tariffs and AI have boosted inflation in the near term, but they’re not the only causes: Price increases have been above the Federal Reserve’s 2% target all decade. Uncomfortably high inflation is a sign that the economy may be overheating.
“Expansionist fiscal policy when employment is full and prices are growing above trend is highly inappropriate,” said Joe Brusuelas, chief economist at RSM US.
There are times when that kind of fiscal response is precisely the right thing to do. The US government acted in unison in 2020 and 2021 with unprecedented economic stimulus to get Americans back to work and compensate for global supply chain snarls during the Covid pandemic. That led to the highest inflation in 40 years – but it quickly brought down the highest unemployment rate since the Great Depression.
“As an economist, I’ll take that tradeoff every day,” said Brusuelas.
The willingness to act
Politicians are often unwilling to do difficult things like cut spending or raise taxes, even in the best of times. But in recent years, we’ve seen a rise of populist politics on both sides of the aisle that makes these possibilities appear even more distant.
The last time the government got its spending under control was in 1998, part of an effort led by former President Bill Clinton and Treasury Secretary Robert Rubin. The budget was balanced, which meant that – for the first time since 1969 – the government spent less money than it brought in. That reversed in 2001 because of a tax cut bill, and the government never looked back.
Perhaps most significantly, the Republican Party has largely abandoned even the veneer of interest in budget-cutting, especially in Trump’s second term.
Vice President Al Gore looks on as President Bill Clinton places a zero on the board during a ceremony at the White House on February 2, 1998. Clinton used the zero to show what the federal deficit would be after unveiling his balanced budget plan for 1999. Paul J. Richards/AFP/Getty Images
Trump has talked a big game about getting deficits under control. He pledged in 2016 to pay off the entire national debt in eight years – a completely unattainable goal – but instead continued to pile on debt at a rapid pace. He started his second term with a Department of Government Efficiency (DOGE) that saved a tiny fraction of its erstwhile chief Elon Musk’s trillion-dollar goal. Its savings were vastly exaggerated by the administration.
Since then, Trump and congressional Republicans passed an immigration and tax bill that the Congressional Budget Office has said will add $4.7 trillion to the debt over 10 years (while ignoring those numbers by using some creative accounting). And now the administration is proposing a massive 40% increase in annual defense spending, to $1.5 trillion.
Some Republicans have occasionally raised concerns about the costs of Trump’s proposals. But Trump has demonstrated a talent for getting his party to go along with What Trump Wants.
So even as the national debt recently passed the $40 trillion landmark, there was barely a murmur coming from the party of fiscal responsibility.
While Trump sometimes joins Democrats in talking about taxes on the wealthy, he has shown little commitment to that. And Democrats would be very hard-pressed to ever get any GOP buy-in on that idea.
