‘Everything is going up’: Americans struggle with affordability despite Trump’s claims

Total household debt reached $18.8tn in Q4 2025 (up 4% YTD), credit card debt hit a record $1.28tn and delinquency rose to 3.26% in Q4 2025 from 1.7% a year earlier. Inflation pressures persist with food prices +2.9% YoY in January and utilities >6% YoY in January 2026, while the bottom 10% of wage earners saw real wages decline 0.3% in 2025 (avg $14.56/hr). Policy actions are exacerbating affordability: tariffs are estimated to have cost households ~$1,700 between Feb 2025–Jan 2026, the One Big Beautiful Bill includes >$1tn Medicaid cuts (plus $536bn Medicare and $186bn SNAP), ACA subsidy expiries raise average premiums +114% to $1,904 in 2026, and the administration is pursuing wage/overtime rollbacks — politically salient risks ahead of the midterms.

Analysis

Income compression at the lower end plus policy-driven cuts to transfers will systematically lower marginal propensity to consume for large swaths of the population, shifting demand away from discretionary categories and into essentials. That rotation is not linear — expect weaker same-store sales, higher promotional activity and faster inventory markdown cycles at apparel/home discretionary retailers, while branded packaged goods with global scale and pricing power will capture outsized share and margin stability.

Persistent pocketed inflation and tariff-driven input shocks elevate credit friction: expect rising unsecured retail delinquencies to translate into wider spreads for consumer ABS and greater funding stress for regional banks and specialty finance. Short-term catalysts (monthly CPI, consumer credit prints, midterm vote outcomes) can spike volatility in credit-sensitive names within weeks; medium-term (2–6 quarters) earnings will reveal the operational damage through margin compression and loss reserves.

The market consensus underestimates how policy uncertainty (tariffs, wage/overtime rule changes, safety-net cuts) increases idiosyncratic dispersion. That creates opportunities to pair durable, cash-generative consumer staples and inflation-protected bonds against levered discretionary chains and regional-bank/consumer-finance exposure; also create convexity trades into potential policy reversals (tariff rollbacks or emergency fiscal relief) which would quickly re-rate cyclicals and compress TIPS spreads.

Key Decisions for Investors

• Pair trade (3–12 months): Long XLP (consumer staples ETF) vs short XLY (consumer discretionary ETF) — equal notional. Objective: capture rotation into defensive, high-margin staples if consumption shifts. Target: 10–20% relative upside; stop if XLY outperforms XLP by 8% in 30 days.
• Inflation convexity (6–18 months): Buy 7–10yr TIPS via IPE or TIP and sell duration via short TLT (or buy TLT puts). Rationale: protects portfolio from sticky core inflation and policy shock; reward if inflation persistence forces real yield repricing. Size to 2–4% portfolio risk budget; unwind if 10y breakevens fall >30bps.
• Credit hedge (3 months): Buy put-spread protection on KRE (regional bank ETF) to hedge exposure to rising consumer delinquencies and reserve build. Use a funded put spread to cap cost; target asymmetric payoff if spreads widen >20%.
• Idiosyncratic retail short (6–12 months): Initiate a put spread on a mid-cap discretionary retailer (e.g., Macy's - ticker M) that shows heavy import exposure and weak inventory turns. Rationale: vulnerable to margin compression and markdown cycles; size small (1–2% notional) and ladder expiries across earnings.
• Quality income long (12 months): Buy PG or KO shares for defensive cash flow and dividend resilience against economic stress. Target total return 8–12% with low beta; hedge topline risk via the XLY short leg if conviction increases.