The Future of the U.S. Economy Under Inflation Fission

For years, the US inflation indicators and commodity prices have been highly synchronized, forming a relatively stable economic signal. However, since the outbreak of the COVID-19 pandemic in 2020, this pattern has shown a significant divergence for the first time. According to data from the US Bureau of Labor Statistics (BLS), as of September 2025, the Consumer Price Index (CPI) year-over-year increase was 3.0%, down from the peak of 9.1% in 2022 to near pre-pandemic levels (about 2%~3). Meanwhile, the Bloomberg Commodity Index (BCOM) shows that prices of key commodities such as oil, wheat, natural gas, soybeans, and coffee remain on average about 50% higher than pre-pandemic levels. This divergence reveals the core issue of the current economy: official data shows inflation cooling, but actual living costs remain high, highlighting the limitations of CPI as an annual YoY change indicator—it captures the speed of price changes but ignores the fact that absolute price levels have permanently risen.

The “apparent cooling” of CPI masks the real risks of commodity prices remaining high, the widening gap in living costs, and the disconnection between financial markets and the real economy. Traditional policy tools are no longer effective under the new paradigm dominated by supply constraints. Behind this divergence lies structural fissures that could turn short-term stability into a long-term crisis—either repeating the stagflation of the 1970s or facing a dual impact of a financial bubble burst and social division.

Analysis of CPI Composition—Why 3% Masks the True Pressure

As the core benchmark for measuring inflation, CPI’s weight distribution and statistical logic determine that it cannot fully reflect the real living pressures caused by high commodity prices. In 2025, the US CPI basket’s weight structure is: goods only 24%, services 42%, housing 33%, energy 7%. This allocation directly explains why commodity prices remaining high are not fully reflected in the overall CPI—this is not only because goods account for a relatively small proportion in the basket, but also because CPI measures the rate of price change YoY, not the absolute price levels. Even if commodity prices have surged significantly compared to pre-pandemic levels, as long as their YoY increase slows, the overall CPI will be pulled down, creating a divergence between data cooling and actual experience of rising prices.

Persistent high commodity prices are at the core of inflation divergence, deeply affecting consumers’ daily lives. In 2025, Brent crude oil prices averaged around $74 per barrel, rebounding more than 80% from the lows of 2020. Although down 20% from the 2022 peak, they remain significantly above pre-pandemic levels. Due to slowing global economic growth to 3.2, demand is weak, and oversupply is expected to push oil prices down further to $66 per barrel in 2026, but this is still about 20% higher than the 2019 average. The high prices of US agricultural products are similarly stubborn.

These macro-level commodity price fluctuations have directly translated into consumers’ daily expenses. BLS data shows that average prices for milk, eggs, and new cars have increased over 30% since 2020. From the internal structure of CPI, in 2025, commodities contribute only 0.3 percentage points to the core CPI (excluding food and energy), an increase from pre-pandemic levels but still insufficient to dominate overall inflation. The main reason is that tariff transmission effects are limited by their weight: in early 2025, US tariffs increased from 2.4% to around 8%~9%. Fed research indicates that during similar tariff hikes in 2018-2019, each 1% tariff increase translated to a 0.1%~0.2% increase in CPI. The tariff adjustments in February-March 2025 directly raised clothing prices by 8% and food prices by 1.6%, but because these items have limited weight in the CPI basket, their impact was diluted by the stable trends in services and housing.

Price increases are unevenly distributed: food and energy are more affected by supply shocks, while durable goods like automobiles are significantly impacted by tariff policies. Energy commodities, with a weight of 7.5% in CPI, contributed a -0.2 percentage point increase in 2025, mainly due to a decline in international oil prices from the 2022 peak. Service prices (such as healthcare, education, dining) showed steady growth at 3.2% in 2025, mainly driven by wage increases—the tight labor market has kept labor costs rising in the service sector, gradually passing through to consumer prices.

This phenomenon is not isolated. In the first half of 2025, global supply chain disruptions, geopolitical tensions (such as conflicts in the Middle East), and US tariff policies intensified commodity price volatility. Regarding the inflation transmission effect of tariffs, JPMorgan predicts that tariff adjustments in 2025 will push core CPI up by 0.25~0.75 percentage points; Yale Budget Experiment Lab’s calculations are more aggressive, estimating that overall tariff changes could raise the effective tax rate to 22.5%, ultimately increasing CPI by 1%~2%. This divergence fundamentally reflects differing assessments of supply-side shock transmission efficiency. There is consensus that the current CPI weight structure and statistical logic underestimate the actual impact of high commodity prices on residents’ living costs.

Living Cost Gap—Lagging Effect of Wage Growth

Although CPI shows inflation cooling, residents’ perceived real living pressure has not eased. The core reason is the persistent living cost gap—wage growth has lagged behind inflation for a long time, leading to a decline in actual purchasing power. From 2020 to 2025, average US hourly wages rose from $29 to $35, a total increase of 21.8%; but during the same period, CPI increased by 23.5%, resulting in a real wage decline of 0.7%. In 2025, nominal wages grew by 4.2%, surpassing inflation by 1.5%, but this dividend only benefits about 57% of workers; many low-income groups and part-time workers still see wage increases below inflation. Data from the Atlanta Fed shows that from 2020 to 2025, the cumulative difference between wages and inflation is -1.2%, indicating that residents’ real purchasing power has decreased compared to pre-pandemic levels.

This living cost gap further exacerbates social inequality. Low-income groups allocate a higher proportion of their disposable income to essentials like food and energy, and the sustained high prices of these goods hit them harder than high-income groups. Morgan Stanley Wealth Management cites Oxford Economics data showing that the lowest income quintile spends an additional marginal propensity to consume that is more than six times higher than the wealthiest. When prices for essentials like food and energy rise, low-income families are forced to cut other expenses or dip into savings to maintain basic living, while high-income groups are less affected.

The widening living cost gap has also triggered significant credit pressures. In 2025, the US overall savings rate fell to 4.6%, well below the 40-year average of 6.4% and the 80-year average of 8.7%. Savings depletion among middle- and low-income consumers is especially rapid. To close the income-expenditure gap, they rely on credit tools, leading to rising default risks: subprime auto loan 60-day delinquencies reached 6.7%, the highest since 1994. This debt-driven consumption mode is unsustainable; once credit tightens, it could trigger a contraction in consumer markets.

More concerning, the living cost gap is weakening the endogenous momentum of economic growth. Although middle- and low-end consumers account for only about 40% of total economic consumption, they are the core drivers of marginal consumption growth—consumption accounts for two-thirds of US GDP, and its resilience directly influences economic trends. Morgan Stanley Chief Investment Officer Lisa Shalit explicitly warns that the real fissure in the middle- and low-income consumer groups is making the economic outlook for 2026 increasingly fragile.

Disconnection Between Financial Markets and the Real Economy

The divergence between high commodity prices and CPI cooling has also led to a serious disconnect between financial markets and the real economy: on one side, ordinary people bear the pressure of living costs, while on the other, asset prices continue to thrive, forming a strange scenario of two economies. In 2025, the S&P 500 rose 15%, corporate profits reached record highs, Goldman Sachs Asset Management’s scale increased to $2.5 trillion, and the financial market’s expectations of inflation cooling and policy easing dominate asset pricing logic.

Gold, as a traditional inflation hedge, more directly reflects market concerns about potential risks. In 2025, gold prices surged from $1,900 in 2023 to over $4,211—more than doubling. This trajectory closely resembles the gold price path during the early stages of the 1971 inflation wave—gold also anticipated currency devaluation and inflation risk before CPI peaked. JP Morgan forecasts that in 2026, gold could rise further to $4,700, supported by ongoing global central bank gold purchases (estimated at 900 tons annually) and the market’s preemptive pricing of stagflation risks.

This disconnect is driven by multiple factors: first, the Fed’s easing expectations mainly favor financial assets. The 75 basis point rate cut in 2025, while not significantly lowering consumer goods prices, provided liquidity support for stocks; second, corporations have maintained profit growth through cost pass-through (such as tariffs) and supply chain optimization amid high commodity prices, creating a divergence between a strained real economy and corporate earnings; third, global capital demand for US assets remains strong. Despite economic concerns, the relative attractiveness of dollar assets sustains market confidence.

It is crucial to note that this disconnect harbors significant risks. Canadian Royal Bank economists warn that if financial markets overly price in policy easing, then when the tariff transmission effects peak in 2026 or inflation rebounds unexpectedly, or economic growth slows sharply, a sharp asset correction could occur, even triggering a financial bubble burst. Apollo’s chief economist Torsten Slok lists five potential risks: re-inflation driven by supply constraints, weaker-than-expected global manufacturing recovery, investment bubbles in AI, liquidity crises in US Treasury markets, and potential political interference in Fed policy. These risks could serve as triggers to break the balance between markets and the real economy.

High Prices, Low Growth: The Fed’s Dilemma

In 2026, US inflation is expected to trend downward overall, possibly falling back to 2.6%, but the pattern of high prices with low increases will persist. Closing the living cost gap may take 4–5 years or longer. After 2026, it will not naturally close but will test the US’s institutional resilience and policy wisdom in an even more extreme way.

Structural supply constraints, lagging tariff effects, and sticky wage growth will keep inflation at relatively high levels, making it difficult for residents’ living costs to ease significantly in the short term. The future of the US economy fundamentally depends on whether it can rebalance and stabilize three key goals: price stability, asset security, and social fairness in an era of supply constraints. This involves redefining economic stability under supply limitations—finding new balances between living standards and financial security. This is not just an economic issue but a ultimate test of national governance. The key is to break political polarization and shift from demand management to supply-side repair: through rational tariff policies to reduce market distortions, reforming immigration and energy policies to ease supply constraints, and investing in infrastructure to enhance long-term productivity.

Under the current political landscape, such reforms face significant resistance. By December 2025, over 40 members of Congress had jointly called on the Fed to redefine the maximum employment goal to include food and energy affordability. This demand essentially pushes the central bank beyond its traditional responsibilities into supply-side management. If by 2026–2027 a mild stagflation scenario emerges—CPI rising back to 4.5%~5%, unemployment rising to 6%—the Fed will face unprecedented political pressure. However, past tariff failures have proven that inefficient supply-side interventions only backfire.

At the same time, each decision to impose tariffs, sanction oil-producing countries, or restrict technology exports to counter domestic inflation accelerates the “de-dollarization” process globally. If by 2027 the US is forced into aggressive rate hikes due to a second wave of inflation, emerging markets might face a repeat of the 2013 taper tantrum, triggering capital outflows, currency collapses, debt defaults, and a chain reaction that could ultimately undermine US Treasury demand—if the US Treasury market, the core of dollar hegemony, experiences a liquidity crisis, 10-year yields could soar to 6%~7%, ending the low interest rate era of the past 15 years.

All policy dilemmas ultimately point to a brutal reality: in an era of supply constraints, it is impossible to simultaneously stabilize prices and asset values; trade-offs are unavoidable. If a second inflation wave occurs, the Fed will be forced to choose between reigniting aggressive rate hikes— risking recession and destroying the real estate and corporate investment reliant on low rates—or succumbing to political pressure and stopping tightening early, allowing inflation expectations to unanchor. Regardless of the path chosen, the “asset prices forever rising, middle class steadily getting richer” scenario established from 2021 to 2025 will collapse. Future fiscal policy will need to shift from demand stimulation to effective supply-side intervention; if political deadlock persists, fiscal policy may fall into a vicious cycle of “raising tariffs—higher inflation—lower growth—larger deficits.”

Inflation bifurcation has become a structural fault line tearing apart the US economy, policy, and society. The US is facing unprecedented challenges in over forty years.