Who’s going to ‘eat’ tariffs? Not US shoppers

We are about to find out who is going to “eat” President Donald Trump’s tariffs. Don’t expect US consumers to be the ones picking up their knives and forks.

While the higher levies have been the subject du jour for months, they are only just filtering through to the checkout. And more hikes will come in the final three months of the year, when holiday shopping gets under way.

The Golden Quarter, so called because it is crucial to companies’ fortunes, is always a stand-off between retailers trying to sell as much full price merchandise as possible, and shoppers seeking deals. With stores needing to pass on the higher import costs, the confrontation will be tenser than usual this year. Unfortunately for retailers, the past few years have given consumers the will and know-how to avoid being stuck holding the bill.

Some companies, including Nike Inc. and cosmetics retailer Elf Beauty Inc., have already raised prices. Others have only begun to do so recently. Primark, part of Britain’s Associated British Foods Plc., began adjustments at its US stores in September. As a discount retailer, Primark follows the lead of rivals, so the fact that it lifted prices by an average percentage in the double-figures implies that the escalation is becoming more widespread. Other increases follow as the inventories retailers built up ahead of tariffs run down. Walmart Inc. warned in late August that its costs were increasing each week as it received new supplies of imported goods.

Consumer spending has remained strong so far. US retail sales rose 3.5% in August, although much of the increase was due to inflation, according to research group GlobalData. Underlying volumes rose by just 0.4%, a deceleration from July’s 1.4%.

But more caution is warranted. Further interest rate cuts look to be off the table for now. The labor market is cooling and wage growth is slowing. It’s natural for nervousness about the employment market to put a brake on spending, particularly if a job loss would require dipping into savings or taking on debt.

But economic forces aren’t the only reasons shoppers balk at higher prices. They’ll also push back because they have had a lot of practice doing so. Soaring costs for gas and groceries in 2022 taught them ways to cope. In retail parlance, this is known as “dialing out” inflation; to everyone else it’s savvy shopping. And Americans are very good at it.Tried and tested ways to save include buying private label goods and visiting discount stores, such as Aldi and Lidl, which sell fewer big brands. Shoppers used to trade up at the holidays. But as private labels have gotten better and the German discounters have introduced more high end products, that’s no longer guaranteed.

Consumers have also learned strategies such as getting together to buy in bulk. Splitting volume purchases provides a better deal — without tying up as much cash and space in the cupboard. Group texts make it easy to send a message to family and friends ahead of a Costco Wholesale Corp. visit. And AI-enabled search engines help shoppers quickly find the best deals.

Substituting items that are becoming more expensive is another coping mechanism. Right now, that means buying less beef and more pork and chicken, for example. When it comes to the holidays, that could mean avoiding products with the highest tariff exposure.

But as prices rise, shoppers turn to even more drastic measures. One route is taking advantage of special offers. While many Americans used July’s bargain bonanza, led by Amazon.com Inc.’s Prime Day, to stock up on household essentials ahead of tariff-induced price increases, it’s likely that some also got a start on their holiday shopping. With Amazon’s second Prime event happening this week and a fresh round of deals being offered by rivals including Walmart Inc. and Target Corp, there is another opportunity to do some early gift buying.

Alternatively, Americans may simply buy less. As clothing, for example, becomes more expensive, they may make do with last year’s party dress or skip that novelty sweater. Faced with falling sales volumes, retailers may be forced into markdowns, thwarting efforts to sell at higher prices.

For the past couple of years, stores have done a good job of controlling discounts. That resolve will be tested this holiday. If retailers are forced to step up promotions to shift goods, they will end up bearing more of the tariff burden.

Overall, sales in the final quarter are expected to increase by 3.1%, according to GlobalData. That would represent the lowest expansion in five years. Plus, the estimate includes inflation; US CPI was 2.9% in August. That doesn’t bode well.

There are a couple of things that could save the holidays.

The first is that the higher income cohorts have seen their personal balance sheets boosted by stock markets roaring back. This could be particularly good news for luxury groups, such as LVMH Moet Hennessy Louis Vuitton SE, where purchasing is correlated with asset prices. But given that the wealthiest 10% — those making about $250,000 a year — account for half of all US consumer spending, the effect could be more widespread.

The other factor is harder to quantify. When times are tough, consumers can confound expectations and throw caution to the wind. Fed up with fear and uncertainty, they take comfort in the holidays, indulging in gift buying and treating themselves, perhaps to a pricey Louis Vuitton lipstick or an Oura ring.

But even if there is a surprise lift over the holidays, it may be short-lived. Tariff-driven hikes are set to continue into the new year. And when credit card bills arrive in January, consumers will be in even less of a mood to pay.