How Tariffs Could Affect Consumer Spending

Tariffs have been one of the hottest topics since the start of the second Trump presidency. There have been many proposals, some enactments followed by delays and several reciprocal tariffs by exporting countries. President Trump is expected to impose reciprocal tariffs on April 2nd, which will be country-specific.

Looking at country-specific tariffs, currently, there are 20% tariffs on China, 25% tariffs on non-USMCA-compliant goods from Canada and Mexico, 10% tariffs on energy products imported from Canada, and 10% on potash from Canada and Mexico. The 20% tariffs on China were implemented in two phases: 10% tariffs on China were implemented on February 4th, with an additional 10% levied on March 4th. Most recently, 25% tariffs on steel and aluminum were levied on all countries. 

In previous Morning Consult surveys, U.S. consumers indicated that they expect the second Trump presidency tariffs to be more inflationary than they were during the first term and that businesses will pass these costs on to customers. One of the main questions for businesses is whether consumers will accept potential price increases or whether consumer spending (category-dependent) will suffer as a result.

The conditions that U.S. consumers face in early 2025 are very different from those encountered in 2018—during the first Trump presidency when multiple tariffs were enacted—and the most recent economic shock—the pandemic. These differences will have implications for the broader U.S. economy.

Consumers are inflation-weary

In the first two months of 2025, U.S. consumers were highly price-sensitive—a higher share of them were willing to walk away from purchases if they believed the price was too high. Although we can’t compare this data point to 2018, as Morning Consult’s tracking began in 2022, it can be compared to the height of inflation during the pandemic. Price sensitivity kept growing despite the lower price growth in 2024– indicating that it takes a long time for consumers to adjust to new price levels. In four years preceding 2018, year-over-year CPI growth ranged from 0% to 2.5%, with a one-month exception. The inflation picture preceding 2025 was significantly higher. In the wake of potential additional price increases, consumers already feel worn down by inflation.

Finances are better compared to last year- but not as good as 2018

Personal Finances Current Conditions—Morning Consult’s measure of consumer finances from the Index of Consumer Sentiment, which goes back as far as 2018, shows that while consumers feel better about their finances (compared to a year ago) consistently since October, the index levels are substantially lower than in 2018. 

Government statistics also indicate that personal finances – although not in bad shape – are worse compared to 2018. Despite the pick-up in Jan 2025, the personal savings rate has been falling since 2024 and is at lower levels compared to 2018. More alarming are serious delinquency rates, especially for auto loans and credit cards. Not all measures look bad: some metrics, such as household and consumer debt payments to disposable income ratios, are not currently worse than 2018 but are moving in that direction. Although consumer finances are not bad, they are more fragile. They are worse than 2020 (an unusual period due to the pandemic and subsequent government support) and, according to some metrics, worse than 2018.

Jobs- a frozen but still healthy labor market- with risks on the high side

The state of the labor market was one of the reasons behind the healthy consumer spending of the last few years and potentially not alarming debt servicing to disposable income ratio. Post-pandemic, the U.S. experienced a hot jobs market, which allowed real wages to rise. At the same time, unemployment levels fell. While joblessness is still at low rates today, other indicators, such as the length of time required to get hired, the number of job openings, and hiring intentions by businesses, are several indicators that show that we are now in a relatively “frozen” labor market. For those looking for a job, this is not considered a healthy or a “good” labor market.

That said, the labor market still allows employed adults to maintain their spending levels. 

Why spending may follow a different trajectory this time 

Although concerns about a possible recession are rising while uncertainty indexes are increasing, so far, consumers continue to spend.  However, like many other economists, we expect slower GDP growth in the near term. Looking at the most significant portion of the GDP, the consumers: their spending trajectory will differ from the most recent shock (the pandemic) or the previous tariff bonanza that began in 2018. For one, government aid, similar to the aid given to Americans in the early days of the pandemic, is unlikely to be given to consumers. Negotiations on tax cuts are ongoing, but once implemented, the consumer will not feel the financial effects of these cuts immediately. Consumer finances are shakier and headed in the wrong direction, especially for lower-income and more vulnerable consumers. Although the labor market is holding on, there are higher risks for unemployment driven by DOGE cuts, secondary effects of DOGE cuts on the private sector, and delayed business activity due to uncertainty surrounding policy decisions such as tariffs and taxes. Labor conditions may worsen if businesses eliminate jobs instead of lowering hiring projections. Finally, consumers are inflation-scarred; they will be looking to cut costs if prices increase and uncertainty about the state of the economy and their financial well-being rises.

Do we see a tariff-driven inflation now?

Before tariffs took the top spot, inflation was among the most discussed economic news. As inflation levels approached the Fed’s 2% target in August 2024 and several labor market conditions cooled, economic conversation gravitated toward jobs. With few tariffs implemented and more expected, inflation and its potential effects on consumer spending are again becoming a popular topic.

While consumers expect tariffs to be inflationary, and studies show the potential price level change on different categories of products, it is too early to say that tariffs have caused an increase in prices. Some businesses likely incurred additional costs from pulling forward their purchases ahead of the seasonal patterns and paying more for longer storage; these extra costs have not yet shown up on the official top-line figures for inflation. At an aggregate level, consumer and producer price indexes were lower than expected last month. 

The data does not yet show any additional costs because price pass-throughs from raw materials to finished goods take time due to contracts in place. Since tariffs on China have been in place for the longest period, we can look at the import price indexes by locality, specifically focusing on China, to see if risks are on the horizon.  

At a topline level, monthly import prices from China increased 0.5% month over month in February, following a slight positive number for January. While the magnitudes may look small, the increases so far this year follow 26 months of either price drops or flat pricing. Underneath these small numbers, the most recent month’s import price indexes rose close to 2% m/m for some upstream categories such as leather or plastics and rubber products manufacturing. This spike may have been caused by U.S. manufacturers pulling forward their purchases. For U.S. businesses that have recently paid higher prices for imported goods, the likelier scenario is to pass on the higher costs for raw materials in three to six months. The stages of processing are one of the reasons why tariff costs are not showing up in the official data yet.

For some categories, where the U.S. imports a higher share of the finished product as opposed to producing it domestically, the increases in the import price index may show up in the consumer price index sooner. This is especially true if the product is imported from a few countries facing tariffs. For example, for a finished product such as footwear, import prices from China have just begun to prop up, the potential increase that the U.S. consumers will see will be dependent on China’s shares of imports (which has been decreasing), the possible tariff rate on other countries, production costs for domestic producers and finally the consumer demand environment. There are many dynamic factors affecting prices right now. Unlike the previous two or three years, policies are swiftly changing, making pricing decisions difficult for businesses. That said, tariffs are too nascent to show up in official data as higher inflation, yet. 

How will consumers react if there is tariff-driven inflation?

Consumers are paying attention to prices and tariffs right now. Understanding consumers' thoughts about potential future spending cuts gives businesses one more data point to consider as they make pricing decisions. In the charts below, we examine two questions: whether consumers expect increased prices due to tariffs and categories they would consider cutting spending if they believe there is tariff-driven inflation.

Looking at the discretionary categories, consumers expect tariff-driven price increases the most for apparel. Among consumers from households making $100k, close to 50% expect higher apparel prices due to tariff-related inflation. It is also important to note that a higher share of high-income households consistently expect more tariff-driven inflation than lower-income households. Similar divergence in expectations is also apparent at generational cuts, with Baby boomers expecting the highest price increases while GenZers have the lowest share. This is intuitive as Baby boomers have seen multiple inflationary cycles, while GenZers have the most recent episode to point to. Baby boomers also pay close attention to the news cycle- primarily through major broadcast networks.

Among the essential items, groceries, followed by gas, are the categories that elicit the highest expectation for increased prices. Not only are these categories the most frequently purchased, but they are also the ones that have seen significant increases before. The gap between the shares for income cohorts differs slightly for essential items. For example, for essentials such as groceries, gas, and personal care products, the share of middle-income households who expect tariff-driven inflation is higher than that of high-income households. This may be tied to the worsening economic outcomes for middle-income households in recent years.

Perhaps the most pressing question is how consumers will reduce spending if tariffs drive up inflation. A higher share of lower-income households expect to cut spending than high-income households. This is not as surprising as high-income households may have additional buffers to tackle an increase in prices (whether transitory or not). However, it is still surprising that nearly 20% of high-income households expect to spend less on groceries and personal care products. As we have shown, higher-income households carry a more prominent weight in topline consumer spending. While a higher share of lower-income households intends to cut spending across the board for essential items, the effect of higher-income households cutting their spending will be more detrimental to U.S. businesses and the economy.

For discretionary spending, a higher share of middle-income households expects to cut spending for most categories. One that stands out in the list of categories is quick service restaurants (QSRs). High-income households have more purchasing power to extend, while low-income households have consistently cut discretionary spending in the last couple of years. The pullback by middle-income households in discretionary and essential spending could perpetuate the environment whereby the gap for average expenditures between high-income and middle-income households widens. In the last few years, at the top line, consumer spending still grew, propelled by high-income consumers.

In the following months, as impacts of current tariffs begin to manifest in the data while upcoming tariff plans become clearer, we will closely examine how consumers, particularly high-income consumers, behave to gauge where consumer spending and GDP are headed.