The State of the Economy Before the Midterms: Rising Inflation and A.I. Unease

Six weeks before the midterm elections, the cost of living is steadily marching upward.

The price of gas has risen to a national average of $4.47 a gallon, up 41 percent since this time last year. The price of diesel fuel has reached a record high. The Federal Reserve raised interest rates last week for the first time in three years; mortgage rates have reached their highest level in more than a year.

Politically speaking, these figures are deeply alarming to Republicans as Democrats try to turn the November election into a referendum on affordability. Polling tells us that voters view the economy as their top issue this fall — and the economy right now is, well, weird.

Tonight, I want to sidestep the political spin and break down what’s really happening with the economy and the cost of living. Lucky for all of us, I’m not trying to do this on my own. I asked The Times’s chief economics correspondent, Ben Casselman, to guide us.

The bottom line: “Broadly speaking,” he said, “the economy is not too bad, but the affordability issues that everybody is so worried about have gotten significantly worse.”

Strong indicators — with a big A.I. question mark

When President Trump talks about the economy, he has pointed to a set of robust metrics, including the unemployment rate and the stock market, to insist that he has a success story to tell. It’s true, Ben says, that these longtime indicators of economic health look pretty decent. They’re just not the whole story.

• The labor force: The unemployment rate right now is 4.1 percent. That’s pretty low, and it means that most people who want a job have one — in part because aging and the immigration crackdown have stemmed the growth of the labor force. But job growth is low, too, and it’s pretty tough out there for young people.

• Wage growth: This has been OK — but it has been slowing this year, and it’s not keeping pace with inflation.

• The stock market: Major stock indexes have been setting records in recent years. If you make most of your money from the stock market, you’re probably feeling good. The boom has been fueled by investor enthusiasm for anything connected to A.I. — but there are big questions about what happens if that confidence wilts.

• Consumer spending: Americans are spending big, Ben told me, in part because of the windfall from the stock market. As prices rise, though, many people are stretching more to keep up their spending.

So, is spending dropping and unemployment rising, as it does in a recession? No! But a big part of what’s driving the economy is investment in A.I. — and if you strip that away, the underlying economy isn’t so strong. This has created a great deal of uncertainty about where the economy is going, Ben said:

“If A.I. succeeds, then it may kill all of our jobs. If it fails, then the whole economy falls apart, and your 401(k) blows up, and maybe you still lose your job. You can kind of understand why maybe people aren’t super enthusiastic about the state of things.”

The affordability problem

We know that people don’t vote based on economic indicators. They vote based on how the economy feels to them — and that’s usually a question of the cost of living. (Just ask the Democrats in 2024.)

• Inflation: The war with Iran has driven up the cost of fuel, making it more expensive to buy stuff. This indicator is nowhere near the high of 2022 — but, after seeming to come under control, inflation picked up again this year, prompting the Fed, led by Trump’s handpicked chairman, Kevin Warsh, to raise interest rates last week.

• The cost of living: Affordability challenges go beyond consumer prices. Because of the interest rate increase, it’s also getting more expensive to borrow money for a car loan, or just on your credit card. (The bond market has been going haywire, too, which has driven mortgage rates higher.)

“Every piece of this affordability issue,” Ben said, “is getting worse rather than getting better.”