Interest rates, inflation, and you: What 2026 has in store for your wallet
Several economic developments could threaten consumers in 2026. It’s not going to be smooth sailing – more like waters that may appear calm, but have hazards lurking just below the surface.
The best way to navigate those hazards is to recognize them and be prepared. Below are six things consumers need to watch out for over the next year.
1. The K-shaped economy creates winners and losers
People often talk about the economy as if everyone in it were moving together. It may be expanding or in recession, but generally, people expect similar experiences.
Lately, though, the phrase “K-shaped economy” has been widely used to depict how divided the experience has become for different segments of the economy.
People are used to seeing charts of economic growth that show a single line, which is either rising, falling, or flat. In a K-shaped economy, you get two lines. As in the letter “K,” one line is rising, and one line is falling. In this case, the rising line is what higher-income people are experiencing, and the falling line shows what lower-income people are going through.
One explanation for why this is happening is the massive investment being made in artificial intelligence (AI). As money has poured into companies providing AI capabilities, the stock market has soared. People who benefit from stock market investments are seeing their finances improve. So are executives in companies that stand to profit from the cost efficiencies AI promises to create. That’s the upward line in the K.
On the other side of this trend are people whose jobs are threatened by AI. Increased job competition suppresses wage growth even for those who remain employed. Their experience represents the downward line in the K.
Be prepared for these divided outcomes over the next year. Even when you hear what seems to be good news about the economy, it may not be good for everybody.
2. The job market continues to show weakness
Even though the federal government has reopened, official statistics on employment have continued to be cancelled or delayed. A clearer picture of the job market should emerge in the next few weeks. Based on how things were going before the shutdown, it’s not likely to be a pretty picture.
Through the first nine months of 2025, job growth was only about half of what it was through the first nine months of 2024. 2025 was firmly on track to be the weakest year for employment since the pandemic year of 2020.
Coming out of the pandemic, strong demand for labor created both job and wage growth. With that demand now weakening sharply, expect jobs to be harder to come by next year and your next raise – if you get one – to be less generous.
3. Credit becomes harder to get
A weakening job market creates financial hardships for many households. Expect this to worsen troubles with consumer credit that have already been brewing.
Serious delinquency rates for payments on all major forms of consumer credit rose during the first nine months of 2025. For credit cards, the percentage of balances 90 days or more overdue reached the highest level since 2011. In the third quarter of 2025, consumer bankruptcies reached their highest level since the first quarter of 2020.
When consumers can’t pay their debts, lenders become a lot choosier about who they’ll lend to and what terms they’ll give. This can show up in a variety of ways. Some consumers may find it harder to get a loan or a credit card. Others might have to pay a much higher-than-average interest rate. In some cases, tighter lending standards may mean they only qualify for smaller loans or lower credit limits.
Access to credit is another way you might see the K-shaped economy taking effect. For consumers with prime credit scores, the rate of serious payment delinquencies remains near zero. For subprime consumers, though, serious delinquencies are above 20%. So, if you have good credit, you should continue to find credit readily available at reasonable terms. However, for people with bad credit, you should expect it to become even tougher or more expensive to get.
4. Inflation hot spots keep flaring up
“Affordability” has become a political theme for both parties heading into the mid-term elections in 2026. While both parties may say they’re focused on bringing down inflation, that’s easier said than done.
For one thing, the cost of tariffs has not yet been fully reflected in inflation figures. Retailers had some existing inventory to fall back on, and could also continue to absorb some price increases temporarily to maintain market share. However, they can’t do this forever.
While the government has backtracked on many tariffs, some remain in place. These may not drive inflation for all items, but expect to see hot spots in the form of higher prices for goods most impacted by tariffs. On the services side, the danger is that mass deportations and visa restrictions may create labor shortages in some occupations. This could also create areas of inflation.
5. Interest rates go down… and up
Beginning in September of 2024, the Federal Reserve has now cut short-term rates by a total of 1.75%. Its latest projections show that it plans another 0.25% cut for 2026. So, at least some interest rates are falling.
However, not all interest rates move in lockstep. Since the Fed started lowering rates last year, the effect on mortgage rates has been slight. Long-term rates, like mortgages, are especially sensitive to inflation concerns.
Notably, since the Fed started cutting rates last year, the yield on 30-year Treasury bonds has risen. If markets think the Fed is being too aggressive about cutting rates, you might see long-term rates rise further. This inflation concern could continue to slow the descent of mortgage rates, and even cause them to rise.
For credit card rates, a key factor is credit risk. As long as delinquency and default rates remain high, card issuers will hedge their risk by charging higher interest rates on cards for subprime customers. For those customers, this could partially or completely offset the impact of Fed rate cuts.
6. The stock market could be punishing for disappointing performers
The upward arm of the K-shaped economy has been fueled in part by impressive stock market gains. Over the past three years, the S&P 500 has produced a total return of over 80%.
That has put a lot of money in the pockets of investors. It has also created a lot of risk. The underlying earnings of companies in the S&P 500 haven’t grown nearly as fast as prices have risen. The price-to-earnings (P/E) ratio on the S&P 500 is up to around 28. Translation: today’s high stock prices show that investors are expecting companies to have dynamic earnings growth.
Given today’s high P/E ratios, even moderate growth could be perceived as a disappointment, triggering steep price declines. If a recession causes earnings to fall, the market reaction would be disastrous.
Again, high stock prices have created a lot of wealth but also a lot of risk. For investors in companies that fail to live up to their lofty expectations, the results could get ugly. This is yet another example of how today’s environment is likely to create a sharp distinction between winners and losers rather than a rising tide that floats all boats.
Planning for what 2026 has in store
Understanding the risks of the economy going into 2026, the following are some suggestions for what consumers can do to prepare:
- Reduce dependence on borrowing. Tightening credit standards and a shaky job market could make 2026 a bad time to borrow heavily. The less dependent your budget is on continued borrowing, the more prepared you’ll be for this risk.
- Build emergency savings. People normally think of emergency savings as a way to prepare for unexpected expenses. However, as the job market weakens, the biggest financial setback many households are likely to face is the loss of a job. Having some savings set aside can make the difference between being able to get by until you find a new job and having to borrow.
- Refinance high-interest debt. Having trouble paying down debt? See if you can reduce the cost of that debt by refinancing at a lower interest rate. A lower-interest personal loan or balance transfer credit card could allow you to put more of your money towards reducing your balance instead of putting it towards interest payments.
- Keep an eye out for better credit card offers. With interest rates moving and credit risk rising, credit card companies react in different ways. A card that was very competitive last year may no longer be as attractive a year from now. Consider how you use your card, and check the market regularly to see if there’s a better card for your needs.
- Look for ways to boost retirement savings. Strong stock market returns have done much of the heavy lifting for retirement savers over the past few years. High returns aren’t likely to continue forever, so you’d be wise to plan on putting aside a little more money in the years ahead.
The nature of a K-shaped economy is that it creates a wider gap between winners and losers. You can’t always predict who will fall into which camp. The benefit of being prepared for the risks of this economy is that it will benefit you whether you’re on the rising or the falling part of the K.
