America’s cost of living crisis

In the UK, politicians are aware of the ongoing cost-of-living crisis, which continues to overhang many lower-income households. While the Ukraine invasion energy spike has eased and inflation has slowed, day-to-day prices are still rising. However, it is not just UK households that are facing this challenge. In the US, a perceived ‘affordability crisis’ is making headlines and the Trump administration’s reaction to it could shape economic and political outcomes ahead of the midterm elections in November 2026.

The easiest fix for Trump is lower US interest rates. However, the Federal Reserve (Fed) is being more cautious given the uncertainty from Trump’s tariffs and the earlier US government shutdown, which delayed the publication of key official economic data. In turn, markets have faced uncertainty about the independence of the Fed as Trump seeks to change the composition of the Fed committee. The latest Trump ‘stunt’ is a Department of Justice subpoena issued to the central bank over the renovation of its offices!

Trump has once again raised the prospect of sending American households a $2,000 cheque using the $600bn already collected from his trade tariffs. While this may face political and legal challenges, Trump is still awaiting a ruling from the US Supreme Court on the legality of his IEEPA tariffs. In the meantime, Trump has already eased back on some US consumer goods tariffs, such as kitchen cabinets, furniture and Italian pasta.

Meanwhile, the affordability crisis is most notable in the housing market, where elevated mortgage rates and home prices are making it increasingly difficult to purchase a home. The US housing affordability index is now worse than the summer of 2006, which was the peak before the 2008 Global Financial Crisis. To help, Trump has announced immediate steps to ban large institutional investors from buying more single-family homes. However, new home building has been adversely impacted by Trump’s tighter border controls, as in the past, US residential construction has relied heavily on an undocumented immigration workforce!

US interest rates remain the key factor. The US 10-year Treasury yield, which reflects inflation and economic growth expectations, remains elevated, as do US mortgage rates, which continue to weigh on housing demand. Markets can expect more political twists and turns ahead of the US midterm elections as well as voter gimmicks such as Trump’s proposed 10% interest rate cap on US credit cards. However, markets will remain most concerned about the independence of the Fed.

 

What have we been watching?

Nervous markets overshadowed by fears of US military intervention in Iran, the DoJ investigation into Federal Reserve (Fed) Chair Jerome Powell and Trump’s threat to impose tariffs on eight NATO allies if they do not agree to the US purchase of Greenland! Gold hit a fresh high, but despite the uncertainty, the FTSE 100 also hit a new all-time high.

Over the weekend, President Trump threatened he would impose an initial 10% tariff on eight European NATO members, including the UK, on February 1st, increasing to 25% in June and until a ‘Deal is reached for the complete and total purchase of Greenland.’  Nobody knows for sure how this will play out. Trump has softened his stance on tariffs previously when forced to by a spike in US Treasury yields and when China restricted the export of rare earth materials. The EU is reported to be drawing up €93bn of retaliatory tariffs to give European leaders some leverage in pivotal meetings with Trump at the World Economic Forum in Davos this week.

Many are hoping that Trump will climb down, but he insists he needs Greenland for America to build his ‘Golden Dome’ missile defence system. Europe needs US support and the current spat risks blowing the NATO alliance apart. The Kremlin and Beijing will no doubt be pleased that the Western alliance appears at breaking point given their respective aspirations in Ukraine and Taiwan. However, financial markets may play a big part in the eventual outcome. Trump’s main Achilles Heel is the huge US twin deficits, so he cannot afford to see US Treasury yields rise, as this could impact the American cost of living crisis and midterm presidential election. For now, the uncertainty of additional tariffs is most unwelcome for investors. Meanwhile, the US Supreme Court may provide further opinions on the legality of Trump’s IEEPA tariffs later this week, which could have further implications for the Greenland situation.                        

 

In the UK, Chancellor Rachel Reeves, no doubt, had a sigh of relief as the November GDP data showed the economy grew by 0.3%, ahead of expectations. Manufacturing activity jumped with the restart of production at Jaguar Land Rover following the cyberattack. While GDP rebounded in November, the growth is still on a soft trend. Meanwhile, a possible inflation headache for the Bank of England as gas prices have jumped by 30% since the start of the year due to a combination of a cold spell, lower gas storage inventories and geopolitical risk. This risks pushing up the energy price cap in April.

 

In the US, core inflation was slightly below expectation in December, while headline inflation was in line at 2.7%. This, together with reasonable retail sales, lower initial jobless claims data and supportive manufacturing activity surveys from New York and Philadelphia, saw investors dial back expectations of a Fed interest rate cut in the months ahead.   

 

In Japan, government bond yields climbed to a fresh multi-decade high as fiscal fears and election fever continue.

 

 

China’s economy grew by 4.5% in the fourth quarter of 2025, down slightly from the growth seen in the third quarter. Meanwhile, retail sales were up slightly in December but below expectation, while industrial output was stronger than expected. However, China’s property sector remains challenging, with new home prices continuing their downward trend in December.

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Brent oil was steady at around $63 despite Trump’s comments on the protests in Iran.

Finally, the ‘Farage Clause.’ Brussels has included a termination clause in PM Sir Keir Starmer’s potential post-Brexit reset deal that would remove Brexit red tape for British food and drink exporters. The ‘Farage Clause’ would see both the UK and EU pay compensation to cover the cost of setting up the necessary border controls and is thought to be an insurance policy by Brussels given the Reform Party’s current lead in polling. Reform has promised to overturn any deal done by the Labour PM and Nigel Farage has said he will not honour any clause. Almost ten years after the Brexit vote, uncertainties remain!

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