The Affordability Challenge

March 20, 2026

Doug Leyendecker

Welcome to This Week’s Leyendecker View

If all you did was look for things to appreciate, you would live a joyously spectacular life.
– Author Esther Hicks

FAVORITE READS OF THE WEEK

The strategy against Iran is working
A Middle Easterner’s point of view.

Private credit is safer than banks are
We’ll see about that.

THINKING OUT LOUD

The Affordability Challenge
It’s not really tariffs, and it’s not really Trump

As of today, the prevailing opinion seems to be that Republicans are losing their advantage in the midterm elections because the country faces an affordability crisis. Democrats will argue that Republicans are out of touch with the struggles of ordinary Americans.

Until events in Iran created a distraction, the dominant narrative was mostly focused on the Trump administration’s tariff policies. The simplified conclusion is that tariffs are raising the cost of imported goods and therefore reducing affordability for many Americans. Now, thanks to Iran, we can add the higher cost of oil to our challenges.

Time will tell the consequences of the Iranian war, but the focus on tariffs serves largely as a deflection from a deeper conversation about the true source of the most damaging inflation facing average households.

Trade policy is politically salient and easy to understand. Tariffs can raise the cost of imported goods, and those higher costs can translate into higher consumer prices. Yet when one examines the composition of inflation over the past two decades, especially in recent years, a much more nuanced picture emerges.

A substantial portion of today’s higher prices stem not from tariff policy but from domestic sectors of the economy where tariffs play little or no role. Tariffs have almost no measurable influence on the domestic services economy. Yet services represent a large share of economic activity—perhaps as much as 85% of GDP, depending on the categories measured.

Over the past 20 years, cumulative CPI inflation has been roughly 64%. However, the categories that have dramatically outpaced that benchmark are overwhelmingly services rather than goods: Hospital services have risen 161%, childcare 91%, college tuition 104%, and college room and board 90%. Motor vehicle repair has increased 108%, water and sewer services 143%, HVAC home services 130%, plumbing services 150%, and homeowners’ insurance 100%. Add to that rent 100%, owners’ equivalent rent 86%, and restaurant prices 98%, and the strain on household budgets becomes even more apparent.

Many of these service expenses are unavoidable and time sensitive. Contrast them with, say, buying a TV, whose costs are far more vulnerable to trade policy. People can delay buying a TV. They cannot delay getting their heating fixed in the dead of winter.

So why has service inflation risen so much faster than CPI? One reason is that many services have limited potential for productivity gains.

A doctor, nurse, HVAC technician, electrician, plumber, psychologist, massage therapist, landscaper, or nail technician can serve only one customer at a time. This places a natural limit on productivity growth. When productivity cannot rise significantly, costs tend to increase with wages.

Given the limited ability to increase productivity in service industries, wage growth in other sectors with higher productivity (like resource extraction and manufacturing) tends to push service wages upward. If a landscaping worker can earn more money on a construction crew, he may change jobs unless his employer raises wages. If housecleaning pays more than working in a nail salon, the nail technician may switch industries. Labor markets with higher productivity potential naturally pull wages upward across service occupations.

Private investment in industries with inelastic demand—markets in which customers must purchase services regardless of price—has also accelerated service inflation. Who will delay replacing an air conditioner in August because the price seems too high? Who will tolerate a broken toilet indefinitely? Who will avoid the hospital during a kidney stone attack? And who will say “no” when a veterinarian recommends surgery for a beloved pet?

Recognizing this inelastic demand, private investors have increasingly acquired service businesses and consolidated them into larger firms. These acquisitions are often justified as a way to increase efficiency. But consolidation also makes it easier to push through price increases, particularly in markets with limited competition where customers have little choice but to pay.

Once large companies formed through investor “roll-ups” raise prices, other market participants tend to follow. If competitors are charging more and getting it, few businesses feel compelled to hold the line.

Finally, there is another powerful driver of service inflation: government regulation. The more heavily an industry is regulated, the greater the costs of compliance, which are ultimately passed on to consumers. Health care, childcare, education, and housing are all highly regulated sectors, and those regulatory costs inevitably push up prices.

Understanding our affordability challenge requires looking at the composition of spending, not simply trade policy. When one examines where price increases have actually occurred paired with which sectors carry the greatest weight in household budgets, the conclusion becomes clear: Today’s affordability crisis is driven far more by rising costs in domestic services than by tariffs on imported goods, most particularly in service sectors consumers cannot do without.

THE RANDOMS

OpenAI wants to sell intelligence like power and water. If intelligence is going to be a utility, then it needs to be regulated and affordable, which means its providers cannot make obscene profits.

Russia is helping Iran find US targets, and now they are sending oil to Cuba. This kind of behavior will not likely go over well with Trump.

Because of the Iran war, Democrats want to pass a windfall profit tax on oil companies. An interesting idea, but why don’t they pass a windfall profit tax on big tech companies? Exxon made $29B in profit last year, while Apple made $112B. Who is earning windfall profits?

Europe has rebuffed Trump’s request for help with the Iranian situation. I guess they’ve never heard the old saying, Hell hath no fury like a Trump scorned.

Does Iran need a freedom-fighting martyr to catalyze the ultimate downfall of the religiously fanatical mullahs? Do they need their own “Remember the Alamo”?

If the US and Israel had not attacked Iran, what would the world look like in the near and long term? A peaceful and cooperative Iran and Middle East? Or more Iranian proxies wreaking havoc not just on Israel but other Middle Eastern countries as well?

The only way to defeat terrorists is to make them more afraid of you than you are of them. Nothing else changes their behavior.

No war goes as planned, for both sides.

ECONOMIC NEWS

Economy

Big surprise increase in producer prices
Amazon may doom USPS
New US cars have become unaffordable
Restaurants struggle, and people drink less

Labor

Labor is getting screwed
Rate of private union membership
Remote workers are more productive

The Lone Star

Driverless big rigs being tested in Texas
Houston factory making material of the future
Shipyard of the future headed to Texas

BUSINESS

Finance

Top hedge fund issues big private capital warning
Apollo exec goes off on private equity and credit
Small businesses push back on private equity
How banks are tangled up in private credit