Rising prices and elevated interest rates in 2025 have put middle‑income households under significant pressure. Inflation came down from its 2022 peak but has remained above central‑bank targets.
According to research from the Federal Reserve Bank of Cleveland, consumer price inflation reached nearly 9 % in June 2022 and then declined to around 3 % in late 2023 and early 2024. Wage growth rose from around 3.5 % annually before the pandemic to more than 6 % at its 2022 peak and stayed strong during the disinflation phase. While rising wages cushioned the blow for many families, the Cleveland Fed found that inflation affected households differently: low‑income households experienced higher inflation and higher wage gains, while households in the middle and top income quintiles faced smaller wage growth. By the end of 2024, the bottom and middle 40 % of the income distribution had seen about 4.5 percentage points more cumulative wage increase than price increase since 2019, whereas the top 20 % recorded about 3.5 percentage points. This background sets the stage for understanding why 2025 has been challenging for middle‑income households and what it means for borrowing.
Rising cost of living
Even though headline inflation moderated, the cost of essentials—food, housing and utilities—continued to rise faster than incomes for many families. Primerica’s Household Budget Index shows that the cost of necessities for middle‑income households rose by 32.7 % between January 2021 and the third quarter of 2025, while wages increased by just 23.5 %. Fox Business reports that only 21 % of middle‑income Americans surveyed in Q3 2025 thought they would be better off financially the following year, whereas 34 % expected to be worse off.
Respondents said higher prices are forcing tough choices such as delaying purchases, tapping savings or taking on debt. The share of households rating their finances as “poor” or “not so good” rose from 32.2 % in early 2021 to 55 % in mid‑2024 and remained elevated at 45.5 % in Q3 2025. Many people are also finding it harder to pay off credit cards each month: the percentage who pay their balances in full dropped from about 47 % in early 2021 to 29 % in mid‑2025. These figures show that, even with slowing inflation, the cumulative price increases since 2021 are straining budgets.
A separate survey by the American Council of Life Insurers (ACLI) underscores these concerns. The ACLI’s Financial Resilience Index for Q2 2025 indicated that middle‑class households remained financially resilient but under pressure. Half of respondents worried about affording daily essentials in the coming year, up from 38 % a year earlier. Forty‑one percent said they would have to use a credit card or borrow from family or friends to cover an unexpected $5,000 expense. Such anxiety reflects the narrowing gap between wages and living costs.
Borrowing costs: credit cards and personal loans
Credit card interest rates reached record levels in 2025. Investopedia reports that the median average credit‑card annual percentage rate (APR) was 23.99 % in August 2025. This figure is based on advertised rates across hundreds of card offers. The Federal Reserve’s data on actual interest assessed across all accounts shows an average rate of 21.37 % for the first quarter of 2025.
NerdWallet notes that for accounts actually paying interest, the average APR was 22.25 % as of May 2025. High credit‑card rates are tied to the Federal Reserve’s prime rate; although the Fed cut rates late in 2024, it kept them steady at around 4.25 %–4.50 % through the first four meetings of 2025. Because card rates are variable and usually add a margin on top of the prime rate, cardholders felt the impact of elevated interest. Credit card delinquency rates also rose from pandemic lows to about 3.05 % in the first quarter of 2025, and total revolving credit card debt exceeded $1.3 trillion.
For families already struggling with rising prices, these high borrowing costs reduce financial flexibility. Many people rely on credit cards as a buffer for emergencies, and the ACLI survey found that a significant share would use credit cards or personal loans to cover a $5,000 surprise expense. At rates above 20 %, such borrowing can become costly if balances are not paid quickly. Households with good credit may qualify for lower‑rate personal loans, but average personal loan rates still hovered around 11 %–13 % depending on credit quality in 2025. At the same time, strong wage growth in the low‑income sector may enable some households to manage debt better, but middle‑income families with slower wage gains are more vulnerable to high interest.
Housing affordability and mortgage borrowing
Housing costs present another major challenge. In December 2025, Freddie Mac’s Primary Mortgage Market Survey reported that the average 30‑year fixed‑rate mortgage was 6.22 %, while the 15‑year fixed rate was 5.54 %. These rates were near their lowest levels of 2025 but still well above pre‑pandemic norms.
A quarter‑point change can have a significant impact on affordability. Milliman’s mortgage market analysis for Q2 2025 found that the 30‑year mortgage rate averaged 6.79 %, down 21 basis points from Q1 2025. Despite the decline, high rates suppressed housing demand, and most of the increase in mortgage securitizations came from refinancing rather than new purchases. Lenders earned about $950 per loan originated in Q2 2025, indicating they are still recovering from the previous years’ volatility.
High home prices compound the problem. A study by the National Association of Home Builders (NAHB) found that, with a median new home price of $459,826 and a 6.5 % mortgage rate, about 74.9 % of U.S. households could not afford a median‑priced new home in 2025. This implies that roughly 100.6 million households are priced out of the market.
The study highlighted how sensitive affordability is to rate and price changes: raising the median home price by just $1,000 would price out an additional 115,593 households, and a 25‑basis‑point increase in the mortgage rate (from 6.5 % to 6.75 %) would price out roughly 1.1 million households. These figures underscore how rising prices and interest rates squeeze middle‑income buyers, who often rely on conventional mortgages with limited down payments.
Implications for middle‑income households
The combination of elevated living costs, high borrowing rates and slowing wage growth in the middle of the distribution squeezes household budgets from multiple sides. Many families face tough trade‑offs: paying more for groceries and housing leaves less room to save or invest. When emergencies arise, they may turn to credit cards or personal loans at high interest rates, increasing debt burdens. Low mortgage affordability pushes homeownership further out of reach, meaning some households continue renting or postpone moving up to larger homes. Financial pessimism can also dampen consumer confidence and spending, which in turn affects economic growth.
For lenders and policymakers, rising delinquency rates and increased reliance on credit could signal a need to monitor financial stability. On the one hand, stronger wage gains for lower‑income workers and cooling inflation offer some relief. On the other hand, the cost of essentials and borrowing remains elevated. If interest rates decline further in 2026, borrowing conditions may improve; however, if inflation resurges or rates remain high, middle‑income families could face continued pressure.
Navigating borrowing decisions
Given this environment, households should approach borrowing carefully. It is essential to differentiate between good debt and high‑cost revolving debt. Carrying high‑interest credit card balances can quickly erode financial health. Paying off balances in full each month, when possible, helps avoid interest charges. For those who must carry a balance, exploring balance‑transfer offers or fixed‑rate personal loans with lower rates can reduce borrowing costs. However, consumers should read terms carefully and ensure they can meet repayment schedules.
When considering mortgages, borrowers should evaluate whether a fixed‑rate loan at today’s rates fits their budget and long‑term plans. While rates could fall further, predicting interest‑rate movements is difficult. Prospective buyers may benefit from strengthening their credit profiles and saving for larger down payments to secure better loan terms. In all cases, individuals should seek advice from qualified financial advisors or housing counselors to understand options. This article provides general information for educational purposes and does not constitute personalized financial advice.
Conclusion
Rising prices in 2025 have squeezed middle‑income households by widening the gap between living costs and wages. Essentials such as housing, food and utilities continue to climb at a faster pace than income, leaving many people pessimistic about their financial future. High borrowing costs—from credit card rates above 20 % to mortgage rates near 6 %—compound the problem by making debt more expensive and homeownership less attainable. As households adapt to this environment, they need to balance short‑term needs with long‑term financial health. Monitoring expenses, minimizing high‑interest debt and seeking professional guidance can help navigate a period in which inflation may be easing but the cumulative effects of price increases and high rates continue to squeeze the middle class.
Sources :
https://www.clevelandfed.org/publications/economic-commentary/2025/ec-202511-did-inflation-affect-households-differently
https://www.foxbusiness.com/economy/middle-income-americans-pessimistic-about-financial-future-amid-persistent-inflation-analysis-shows
https://www.planadviser.com/inflation-wears-down-middle-class-financial-resilience/
https://www.investopedia.com/average-credit-card-interest-rate-5076674
https://www.freddiemac.com/pmms
https://www.nahb.org/-/media/NAHB/news-and-economics/docs/housing-economics-plus/special-studies/2025/special-study-households-priced-out-of-the-housing-market-march-2025.pdf
