In the United States, growth is holding up, unemployment remains low and consumer spending shows no sign of slowing. On paper, that should flatter the president’s party ahead of the midterms. Yet, Republicans could lose control of Congress. The rise in the cost of living, which weighs on households far more than macroeconomic aggregates suggest, could be one of the reasons. On top of persistent inflation, rekindled by the war in Iran, there is also a slowdown in wage growth and rising housing costs. The election could hinge on affordability, yet whichever party wins will lack the means to address it. A change in the majority in Congress will nonetheless have an impact on the country’s economy.
On 3 November, Americans will elect a new Congress for the next two years. With Republicans currently in control of the White House, the House of Representatives and the Senate, the balance of power in Washington could shift. Polls suggest that the House, at least, could swing to the Democrats. Beyond the new balance of power, the vote will reflect how voters view the way the country is being run. Here, we focus on the cost of living.
Inflation: The incumbents’ burden
The incumbent party goes into the election with two handicaps. The first is structural: no matter who holds the White House, the president’s party almost always loses seats in midterm elections. The second stems from the combination of robust but uneven growth and persistent inflation, which is undermining household confidence. Pre-election polls[1] confirm this assessment: the economy and the cost-of-living top voters’ worries.
Inflation has overshot the Fed’s target every year since 2021. Prices are up 28% over five years: 31% for housing (not including mortgage rates, which have more than doubled), and 29% for food. This shock is felt all the more keenly as it is the most severe in forty years and follows on from decades of low inflation[2]. Furthermore, it hits the lowest-income households the hardest. In addition, the election comes after an energy-driven rise in inflation. Energy accounts for the entire gap between the latest CPI reading (3.7% y/y in September) and the last figure recorded before the conflict in the Middle East started (2.4% y/y).
Fuel has made things worse. The rise in the price of a gallon (46% between February and October) caused by the Iran war – which is unpopular even amongst Republican voters[3] – is an aggravating factor. In 2026, inflation only slightly crossed the ‘attention threshold’, the 3.6%y/y rate beyond which households start to regard it as problematic[4]. Fuel is a recurring, unavoidable expense whose price is directly observable, unlike many items in the CPI basket. This results in a substantial gap between perceived inflation and measured inflation.
It's not just prices
The 2022 midterms suggest caution in reading the polls. Democrats defied expectations of a ‘Republican wave’, retaining control of the Senate and losing the House by just a few seats, even though inflation averaged 8% that year. This reminds us that inflation must be viewed alongside the other drivers of households’ well-being. Indeed, how people experience the cost of living depends on the interplay between prices, wages and housing. In 2022, wages, payrolls and the housing market were all growing faster than in 2026. Today, all three are moving the wrong way for most Americans.
Wage growth is slowing just as inflation picks up again. In September 2026, average hourly earnings were up 3% y/y in nominal terms, the slowest rate since 2018, and now below inflation. Real wage earnings are therefore falling (-0.7% y/y in September, with six out of nine months showing a decline in 2026). The rise in the cost of living is thus compounded by a net loss of purchasing power. The Atlanta Fed reports that wage growth is lower for the bottom quartile of earners (the 25% of employees with the lowest pay) than for the top quartile (the 25% with the highest pay): 3.8% y/y vs. 4.4% on average since late 2024, following 10 years in which the gap favoured the bottom quartile. Top earners also benefit most from the wealth effect linked to stock market valuations. This explains the resilience of aggregate consumption. However, this rests on a relatively narrow base, mostly households earning more than USD 125,000/year[5]. Meanwhile, a falling saving rate (3.8% in September 2026, down 1.4pp y/y) suggests households are drawing on their savings to offset price rises. A large share of the population is therefore excluded from the growth that has been observed.
Beyond wages, there is the question of employment prospects. The unemployment rate remains low and consistent with full employment. Yet the labour market looks stagnant: low firing despite repeated shocks and low hiring despite solid growth. Payroll growth (an average of 68,000 per month since January) is well below that of the previous decade (nearly 200,000 per month between 2011 and 2019[6]). Combined with a workforce that is no longer growing due to an ageing population and a restrictive immigration policy, this is enough to keep the unemployment rate low and the labour market looking healthy. But households are likely to be suffering from a lack of opportunities, and consequently from a lack of prospects for wage growth that would help them to increase their purchasing power. The Conference Board’s labour differential, a gauge of perceived job availability, says as much: outside the pandemic, it is at its lowest since 2015.
Housing is the area that has deteriorated the most. The rise in mortgage rates that began in 2022, from under 4% to over 7%, has dampened the property market. This is true on the demand side, as expected, but also on the supply side. The sharp rise in interest rates is deterring homeowners with low-interest mortgages from selling, as they would have to borrow again at current rates. This ‘lock-in effect’ prevents prices from falling despite weaker demand. The lock-in effect is also affecting tenants, as the decline in the availability of housing is driving up rents. Housing lies at the heart of the disconnect between the macroeconomic picture and voters’ perception of it, as they face a multifaceted rise in the cost of living. That rise is also driven by credit: monthly repayments on a home of the same value have risen sharply. This additional cost, which inflation figures do not capture[7], erodes households’ purchasing power in the property market.
A Congress powerless on the cost of living
The next Congress will, in all likelihood, have little room for manoeuvre. Neither party is within reach of the thresholds required to override the filibuster (which allows 41 out of 100 senators to block a bill from coming to a vote) and the presidential veto (two-thirds of both chambers).
Affordability is likely to be a key issue in the election, but the winners will lack the tools to address it. The Democrats’ agenda relies notably on the reintroduction of schemes that were abolished or scaled back under the current administration (Affordable Care Act tax credits, Medicaid). Even if Congress passed them, they would be subject to a presidential veto. There is no question of direct support for households or a restrictive fiscal policy.
Whether inflation falls will depend on two factors: how the conflict in Iran unfolds and the effectiveness of monetary policy. The labour market should hold its current balance: robust growth (see our EcoFlash) is supporting demand, whilst failing to alleviate supply-side pressures, and the unemployment rate could continue to fall. Household sentiment will continue to depend on how prices develop. As for housing, it is unlikely to improve in the short term. With the 10-year Treasury yield still at 4.8% at the end of 2027 (BNP Paribas forecast), 30-year mortgage rates would, at best, remain around 7%.
The other economic stakes of the vote
Historically, divided governments have brought legislative stability, which is viewed favourably by the markets. But polarisation has increased in recent years and is likely to feature prominently in the budget vote and the debt-ceiling debate. The debt limit, in particular, could be reached as early as Q1 2027, depending on the Treasury’s borrowing requirements. The current administration, meanwhile, has taken major decisions (on tariffs, immigration and Iran) without involving Congress, a practice that is likely to continue.
Risks to the deficit remain tilted to the upside. According to our baseline scenario, it is expected to remain stable at 6.3% of GDP in 2027, but the post-election balance of power could add to the cost of the war in Iran and rising debt-service costs. In particular, interests could align in favour of increased spending could arise, should the Democrats gain control of both houses of Congress. Avoiding, or ending, a shutdown could require a trade-off involving mutual concessions from the presidency on key, popular aspects of the Democratic agenda (such as healthcare), and from the Democrats on defence.
The AI sector is exposed to the vote. The economic stakes are high given how much the associated investment cycle and the wealth effect contribute to US growth. However, at this stage, the risk is not legislative. As with the cost of living, sweeping legislation is unlikely, all the more so with a president holding a pro-AI stance, and who holds the right of veto. The risk lies rather in sentiment and further out. A Democratic sweep could lead to increased congressional activism on regulation, on concentration in the AI industry, and on the knock-on effects on the cost of living (data centres and electricity) and on jobs. Putting these issues on the agenda could create a climate conducive to tighter regulation in the medium term and weigh on the sector’s valuations. Furthermore, the mid-term elections will see 36 governors’ seats up for election. These governors have extensive powers (regarding authorisations and incentives) when it comes to the establishment of data centres in their states.
Finally, the midterms will matter for monetary policy. The Senate confirms, by simple majority, the president’s nominees to the Fed’s Board of Governors. Consequently, should the Senate come under Democratic control, President Trump would need a consensus pick to replace Governor Powell from 2028 – or to fill any other seat that might become vacant during the next Congress.
*****
Whatever the outcome of the election, disinflation and, more broadly, relief from the cost of living, depend less on Congress than on the White House and, to a lesser extent, the Fed. The key factor lies in the resolution of the conflict in Iran, coupled with an effective monetary policy to enable a sustainable return to price stability.
