Why Life Got More Expensive After 2020, and What Ordinary People Can Learn From It

For the last few years, many people have felt a simple truth in their daily lives: money does not stretch as far as it used to. Mortgages cost more. Credit card interest costs more. Saving for a first home feels harder. Even when wages rise, they often do not feel as though they are rising fast enough.

To understand why that happened, we need to understand what the Federal Reserve is, what it did after 2020, and why that changed the price of almost everything. The Federal Reserve is the central bank of the United States. In simple language, that means it is one of the main institutions that influences how expensive it is to borrow money and how much financial pressure is in the economy. (1)

The basic story starts in early 2020. When the pandemic hit, the Federal Reserve cut its main interest rate to a target range of 0 to 0.25 percent. It also announced very large purchases of Treasury securities and agency mortgage-backed securities to support financial markets and keep credit flowing. In plain language, money became unusually cheap to borrow, and the financial system was given a great deal of support very quickly. Around the same period, mortgage rates also fell to extraordinary lows. Freddie Mac’s mortgage-rate series reached 2.65 percent in January 2021. (2, 10)

When borrowing becomes very cheap, people and businesses are more willing to borrow and spend. The Federal Reserve itself explains this clearly: lower interest rates tend to encourage households to borrow for homes, cars, and improvements, and they encourage businesses to borrow to expand and hire. That does not automatically cause inflation by itself, but it does push demand higher. If demand rises faster than the supply of goods and services, prices usually rise too. That is one reason inflation later became such a serious problem. By June 2022, the Consumer Price Index, which is a common measure of how overall prices change, was up 9.1 percent from a year earlier, the highest reading in about 40 years. (3, 4)

At this point, many people say, “The Fed printed money.” That phrase is emotionally understandable, but it needs to be used carefully. A better way to say it is this: the Federal Reserve made money very cheap, expanded its balance sheet, and supported extremely loose financial conditions. Broad money in the economy, often measured by something called M2, rose sharply after the pandemic. But one measure that is often quoted in dramatic videos, called M1, also jumped for a technical reason: in May 2020 the definition changed, and the Federal Reserve says that this alone added about 11.2 trillion dollars to that series. So the clean lesson is not that one scary chart proves everything. The clean lesson is that money and credit expanded sharply, and that added to inflation pressure. (5, 6)

Once inflation became too high, the Federal Reserve reversed direction. By May 2023, it had raised its policy rate to 5 to 5.25 percent. That was a very fast move from the near-zero settings of 2020. Since then, rates have come down somewhat, but they are still well above the pandemic emergency level. In March 2026, the Federal Reserve kept the target range at 3.5 to 3.75 percent and repeated that its longer-run inflation goal is 2 percent. In the same month, consumer inflation was still 3.3 percent, not 2 percent. That means inflation is lower than the 2022 peak, but it has not fully gone away. (7, 8, 9)

This is why life still feels expensive. Higher interest rates are supposed to cool the economy by making borrowing harder. The Federal Reserve explains that higher rates restrain borrowing by households and businesses. That is how inflation is supposed to slow down. But the same medicine that helps slow inflation also hurts. A more expensive mortgage means a home becomes less affordable. A more expensive business loan means a company may delay expansion or hiring. A more expensive credit card balance means a household loses more income to interest payments rather than using it for normal life. (3)

We can make the housing pressure concrete with simple maths. The monthly payment on a fixed mortgage depends on the size of the loan, the interest rate, and the number of months. A simple version of the formula is:

\[M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}\]

Here, $M$ is the monthly payment, $P$ is the loan principal, $r$ is the monthly interest rate, and $n$ is the number of monthly payments.

Suppose someone borrows 400,000 dollars over 30 years. At a 2.65 percent mortgage rate, the monthly payment is about 1,611.86 dollars. At a 7.79 percent mortgage rate, the monthly payment rises to about 2,876.71 dollars.

\[\begin{aligned} M_{2.65\%} &\approx 1,611.86 \\ M_{7.79\%} &\approx 2,876.71 \\ 2,876.71 - 1,611.86 &\approx 1,264.86 \end{aligned}\]

That is about 1,264.86 dollars more every month. The Consumer Financial Protection Bureau also notes that mortgage rates rose from 2.65 percent in January 2021 to a peak of 7.79 percent in October 2023, pushing the payment on a 400,000 dollar loan up by more than 1,200 dollars. So when people say higher rates are crushing affordability, they are not imagining it. (10)

Inflation hurts in a different way. It quietly reduces what your cash can buy. A simple formula for the real buying power of money after inflation is:

\[\text{real buying power} = \frac{\text{money}}{1 + \text{inflation rate}}\]

Now let us put numbers into it. If you had 1,000 dollars and prices rose by 9.1 percent, then:

\[\begin{aligned} 1,000 \div 1.091 &= 916.59 \\ 1,000 - 916.59 &= 83.41 \end{aligned}\]

That means your 1,000 dollars would buy only about 916.59 dollars’ worth of last year’s goods. In other words, you lost about 83.41 dollars of buying power without seeing the number in your bank account fall. That is why inflation feels sneaky. The money is still there, but it does less work. (4)

So where does that leave ordinary people in 2026? The economy is not in a clean, comfortable place. Growth has slowed. United States gross domestic product, which means the total value of goods and services produced in the economy, grew at an annual rate of just 0.5 percent in the fourth quarter of 2025. Inflation in March 2026 was still 3.3 percent, above the Federal Reserve’s 2 percent goal. Put simply, growth is soft, but inflation is not fully beaten. That is exactly the kind of environment that makes households feel trapped: prices are still high, but the medicine used to fight them still hurts. (8, 9, 11)

This is the part many people miss. When cash loses buying power and borrowing gets more expensive, the real divide in society becomes clearer. People who own productive assets often have a better chance of protecting themselves than people who rely only on wages and idle cash. A productive asset is something that can grow in value, pay income, or both. Shares in businesses are productive assets. Property can be a productive asset. A broad stock market fund is simply a basket that owns many companies at once. A real estate investment trust is a company structure that owns or finances property and, under United States rules, generally must distribute at least 90 percent of its taxable income. That rule exists so ordinary investors can get property exposure without buying an entire building themselves. (12)

That does not mean assets only go up. They do not. Prices can fall hard. The important idea is different: falling prices can create future opportunity for patient buyers. During the 2020 crash, the Standard and Poor’s 500 index, a widely used measure of the United States stock market, fell sharply from its February 19, 2020 peak to its March 23, 2020 low. The St. Louis Federal Reserve later noted that the index had fallen to 66 percent of its peak by March 23, then recovered so strongly that by February 19, 2021 it had reached 115 percent of the pre-crisis peak. That does not guarantee that every future fall will recover quickly, but it does show why long-term investors care about staying invested rather than panicking at the worst moment. (13)

There is also another side to financial resilience: earning power. Your portfolio can only grow if you have something to feed into it. One Social Security Administration study found that, over a lifetime, men with bachelor’s degrees earned about 900,000 dollars more than male high school graduates, while women with bachelor’s degrees earned about 630,000 dollars more than female high school graduates. The precise numbers are less important than the lesson. The ability to earn more matters enormously because extra income becomes savings, and savings become assets. (14)

We can show that with one more simple formula. Suppose someone manages to invest an extra 20,000 dollars per year and earns 8 percent a year on average for 20 years. This is only an example, not a promise. The future value of a steady yearly investment can be written as:

\[\text{future value} = \text{yearly contribution} \times \frac{(1 + \text{return rate})^{\text{years}} - 1}{\text{return rate}}\]

Now substitute the numbers:

\[\begin{aligned} \text{future value} &= 20,000 \times \frac{(1.08)^{20} - 1}{0.08} \\ &= 20,000 \times 45.7619643 \\ &= 915,239.29. \end{aligned}\]

That is why higher earnings matter. An extra 20,000 dollars is not just more spending money today. Over time, it can become a very large pile of capital.

There is one last obstacle, and it is psychological. Daniel Kahneman’s work on decision-making made famous the idea of loss aversion. In simple language, people usually feel the pain of losses more strongly than the pleasure of gains. That matters in investing because it makes people want to sell after prices fall, exactly when fear is highest. So the practical lesson is not “predict the next Federal Reserve meeting perfectly.” The practical lesson is much calmer: understand why money became expensive, understand why inflation damaged cash, and build a system that lets you keep saving and investing without letting fear make every decision for you. (15)

The most honest conclusion is this. The Federal Reserve did not set out to make ordinary life miserable. It first tried to prevent collapse, then it tried to slow inflation, and both actions had side effects that households could feel very directly. That is why the last few years have felt so strange. Money was first made extremely cheap, then deliberately made expensive. Prices first surged, then refused to fall back neatly. The people who navigate this period best will not be the people who guess every headline correctly. They will be the people who understand the system clearly, protect their buying power, keep building earning power, and steadily move from owning only cash to owning productive assets as well.

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