Can the cost of living decide the 2026 US midterms? Morgan Stanley flags energy prices as a key risk

That is because the economy is becoming increasingly visible at the household level. Inflation remains high for Americans, while higher energy prices are putting pressure on both household spending and economic growth. With the midterm elections approaching, those pressures could become a political problem for the party in power.

Historically, midterm elections have been difficult for the president’s party. Since 1922, the party occupying the White House has lost an average of 30 seats in the House and four seats in the Senate during midterm elections. In 2026, control of the House is already finely balanced, with Democrats short of just a small number of seats to take control.

But history alone may not determine this election. Morgan Stanley Wealth Management’s Global Investment Office believes the bigger question could be whether voters feel that their financial lives are getting better or worse.

Why the cost of living could be significant

Voters do not experience the economy through GDP figures. They experience it through prices. Gasoline and electricity are particularly important because they are among the costs people notice most directly. Morgan Stanley points to energy prices as a key factor that could shape perceptions of financial well-being and, ultimately, voting behaviour.

“Inflation often speaks louder with voters than economic growth, because it directly affects affordability,” the Morgan Stanley analysis said.

July’s consumer price index showed headline inflation at 3.5% year on year. While that represents an improvement from some of the higher readings seen recently, it is still above the pre-pandemic levels many households use as a reference point.

Economic growth, meanwhile, may not provide enough of a political cushion. Morgan Stanley expects the US economy to grow 2.3% in 2026, compared with 2.1% in 2025. Historically, stronger growth has helped the incumbent party, but the expected improvement this year is relatively modest. That leaves voters with a simple question, are prices coming down fast enough to make everyday life feel easier?

The gas pump could become a political battleground

Among all the prices Americans encounter, gasoline may carry an unusually strong political weight. People see the price every time they stop at a fuel station. That makes it what economists call a highly “salient” price, one that is visible, frequent and easy to remember.

“And gasoline prices tend to be some of those prices that stick out in people’s minds,” Morgan Stanley’s Global Chief Economist Seth Carpenter said.

The historical numbers make the connection particularly striking. According to Morgan Stanley, since 1978, midterm election cycles in which gas prices rose from January of the previous year through October of the election year were associated with an average loss of 32 House seats for the incumbent party. When gas prices fell, the average loss was six seats.

That history could matter this year as conflict in the Middle East puts pressure on global oil and gas supply chains. For the economy, the problem goes beyond what Americans pay at the pump. Higher energy prices leave consumers with less money to spend elsewhere.

“Our U.S. economics team has estimated that the higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending from the higher tax refunds this year,” Carpenter said in a Morgan Stanley podcast.

Morgan Stanley has already cut its forecast for US economic growth by around 0.3 to 0.4 percentage points because of higher energy prices.

“I think the real hit here is going to be from the higher costs acting like a drag on consumer spending,” Carpenter said in a Morgan Stanley podcast.

The energy problem is spreading

The pressure is not limited to gasoline. Morgan Stanley also points to electricity costs, particularly in areas experiencing rapid growth in data-centre power demand. A Bloomberg analysis cited by the firm found that wholesale electricity prices in areas near data centres had increased 267% from 2020 levels, compared with a 30% increase nationally. That could make energy costs an increasingly regional political issue.

For voters, however, the economic distinction between headline inflation, energy inflation and broader price pressures may not matter much. What matters is whether their monthly expenses are becoming harder to manage. That is where the political and economic cycles begin to overlap.

Washington has limited room to respond

Higher prices create an obvious political temptation: give households some relief before the election. In theory, policymakers could consider direct stimulus, targeted transfers, energy rebates, healthcare support, housing assistance or other measures aimed at households facing the greatest pressure. But Morgan Stanley believes there are significant constraints on what Congress can actually deliver before November.

The first is the US fiscal deficit. The second is the difficulty of getting major legislation through Congress. The third is time. As the election gets closer, lawmakers have less room to pass major legislation as campaigning takes priority. The fourth is implementation: even after a policy is approved, it can take time for the money to reach households.

“As you get closer to midterms – really any election – the window for passing major legislation narrows pretty quickly,” Ariana Salvatore, Morgan Stanley’s Head of Public Policy Research, said in the podcast.

That makes timing particularly important. A relief package announced close to the election may sound significant politically, but if households do not feel its effects quickly, its economic impact may be limited.

“Even well targeted policy might not hit the economy in time to have the desired effect before the election,” Carpenter said.

More relief could create another problem

There is another complication. Even if Washington manages to provide targeted assistance, it could have an unintended effect on inflation.

Support directed towards lower-income households could produce a relatively quick increase in spending because these households are more likely to spend additional income rather than save it.

Measures such as SNAP benefits, energy subsidies or tax rebates could therefore offer meaningful relief to households facing the greatest affordability pressures. But if that support keeps consumer spending strong while energy prices remain elevated, inflation could get another push.

“That spending with higher prices, well, that could easily lead to a tick up in inflation,” Carpenter said. And that could put the Federal Reserve in a difficult position.

If stronger spending pushes inflation higher while economic growth also picks up, the Fed may have less reason to cut interest rates and could even face pressure to raise them.

“If it was strong enough, if growth picked up enough and inflation picked up from here, you could easily see the Fed hiking rates instead of cutting,” Carpenter said.

For policymakers, therefore, helping consumers is not simply a question of spending more money. The timing, size and target of that support could determine whether it eases economic pressure or adds to it.

The president cannot simply write the cheques

One possible solution would be for the White House to bypass Congress and send money directly to households. But Morgan Stanley argues that the legal and practical barriers make this difficult.

Fiscal spending is fundamentally tied to congressional authority. Existing tax refunds are possible because the money is already authorised under the tax code. A new programme of broad-based payments would require a different legal basis. “Spending power, as you know, resides in Congress, and that’s a pretty firm constitutional boundary,” Salvatore said.

Even if the administration attempted a large-scale payment programme without clear congressional authority, legal challenges could arrive quickly. Courts could intervene before the money was fully distributed. That makes direct fiscal relief from the White House a much less straightforward option than it may appear.

What investors should watch

For financial markets, the midterms may create uncertainty in the months leading up to the vote. But history suggests that markets have often performed better once the election is over and investors have greater clarity about the political landscape.

S&P 500 has historically delivered relatively muted returns in the year leading up to midterm elections. After the vote, however, the pattern has often changed, with the index gaining an average of 13% in the 12 months following midterm elections.

Government composition also matters. Under a Republican president and a split Congress, the S&P 500 has historically gained around 23% in the year after midterms, compared with 12% across all midterm outcomes.

The bond market may remain more complicated. Treasury yields have historically been more volatile during midterm years, while this year’s inflation and energy-price pressures could make the usual pattern less reliable.

Morgan Stanley expects the Federal Reserve to keep rates steady through the end of the year, with elevated inflation and uncertainty around energy prices limiting its room to ease.

A divided government could bring stability and gridlock

A divided government may offer some comfort to investors because it makes sweeping legislative changes less likely. That can create greater policy stability, but it can also bring another familiar Washington problem: political gridlock.

Budget negotiations, government shutdowns and debt-ceiling confrontations could become more likely. Morgan Stanley sees potential opportunities for sectors such as defence, technology and financial services, while warning that energy, healthcare, private equity and digital assets could face greater uncertainty.

Technology companies involved in artificial intelligence, semiconductors, cybersecurity and enterprise software could continue to benefit from policies focused on innovation and competition with China. Financial institutions could benefit from greater regulatory clarity and a more favourable environment for mergers and acquisitions. Other sectors may find a fragmented policy environment harder to navigate.

In the end, voters may decide by what they can see. The 2026 midterms will inevitably be shaped by candidates, political campaigns and control of Congress. But beneath all of that, Morgan Stanley’s analysis points to a more basic force: the economy people experience in their daily lives.

Higher energy prices are weighing on spending. Inflation remains elevated. Monetary policy is still relatively restrictive. And Congress has limited time and room to provide large-scale relief before voters head to the polls. That leaves the political impact of the economy closely tied to its visibility.

Voters may not remember a GDP forecast or a Treasury yield. They are more likely to remember the price on the petrol station sign. “The key drivers heading into the midterms later this year are likely to remain the ones that are already in place: energy prices, monetary policy, and underlying growth dynamics rather than potential new fiscal stimulus,” Salvatore said in the podcast.