Divided Washington Confronts 3.7% Inflation and $2 Trillion Deficit

Midterm voters across all 50 states sent a sharp message demanding relief from elevated living costs, leaving President Donald Trump and incoming Democratic majorities in the House and Senate to navigate a polarized economic landscape marked by resilient hiring, stubborn 3.7% inflation, and $2 trillion annual federal deficits, according to a November 8, 2026 Associated Press analysis published on KCBS Radio.

According to the AP Voter Poll conducted across 50 states during the midterm elections, household affordability and persistent price pressures topped voters' concerns, fueling Democratic gains even as headline labor and investment indicators remained positive.

A Two-Speed Economy: 165,000 Jobs and an 80.6% Data-Center Surge

Friday's monthly employment report from the Labor Department showed U.S. employers added 165,000 jobs while the national unemployment rate held at a low 4.1%. At the same time, capital spending tied to artificial intelligence has surged. Harvard University economist Jason Furman—who built an economic tracking website called Econvitals using artificial intelligence tools—pointed to data showing that construction spending on data centers jumped 80.6% over the past year, masking softer investment in interest-rate-sensitive sectors such as residential housing and traditional manufacturing.

Despite steady hiring, the Consumer Price Index rose 3.7% over the past 12 months, keeping inflation above the Federal Reserve's 2% target for nearly 6 years. Douglas Holtz-Eakin, president of the conservative think tank American Action Forum and a former director of the Congressional Budget Office, noted that Federal Reserve Chair Kevin Warsh faces a delicate balancing act as tariffs, war-related energy disruptions in the Middle East, and federal deficit spending complicate efforts to bring inflation back down to 2%.

$2 Trillion Borrowing, $1 Trillion Interest, and Social Security Talks

Fiscal policy experts warn that Washington's borrowing trajectory leaves little room for new stimulus or tax cuts without worsening inflation. The federal government is currently borrowing roughly $2 trillion a year, while annual net interest payments on the national debt have surpassed $1 trillion.

John Cochrane, a senior fellow at Stanford University's Hoover Institution, and Marc Goldwein, senior vice president at the nonpartisan Committee for a Responsible Federal Budget, cautioned that bond markets could demand higher yields if lawmakers fail to curb deficits. Although Treasury Secretary Scott Bessent and Office of Management and Budget Director Russell Vought have outlined plans for fiscal consolidation through regulatory rollbacks and discretionary spending restraint, administration proposals to boost defense spending by $500 billion and extend tax reductions have offset projected savings.

One potential area of bipartisan negotiation involves Social Security, whose trust funds are projected to run short of reserves to pay full scheduled benefits around 2032. Democratic Senator Elizabeth Warren of Massachusetts and Republican Senator Bernie Moreno of Ohio have held preliminary discussions on a bipartisan legislative framework aimed at shoring up the program's finances before the 2032 deadline.