An increasingly complicated picture is emerging for retailers. While retail has remained strong through the first seven months of the year, there are indications that American consumers may lack the flexibility to absorb further retail price hikes, especially those that could result from Trump tariff policies, even though the impact of tariff-driven price increases have yet to be felt. 

Commenting on an unexpectedly strong retail showing in July, GlobalData’s Neil Saunders said, “This commitment to spending does not mean that the consumer is immune from the wider challenges in the economy. From our data, we still see signs of constraint. It underscores that consumers are being forced to make choices,” as he cites more bargain shopping and buying from value chains.

“It also points to the limited capacity households have to absorb future shocks – whether from sharp inflation or a significant economic downturn – without cutting back on retail spending. This is a warning signal that has loomed over the sector for some time and is likely to persist into the second half of the year,” he continued.

Wage Growth Slows

Wage growth is slowing, dropping from 3.7% year-over-year in June to 1.2% in July, according to the Bureau of Labor Statistics. And the economy added fewer new jobs after May and June job numbers were revised sharply downward, and July came in well under expectations. 

“Thus far, wage and income growth has helped most households absorb rising expenses. However, if income growth falters, it may become harder for consumers to keep up with increasing prices – potentially weighing on retail spending,” shared Mike Skordeles, Truist head of U.S. economics.

Retail Continues To Thrive

While core retail sales are running well ahead of last year through July, up 4.1% year-over-year (excluding autos, gasoline stations and food services), experts speculate much of that growth was due to pulling forward purchases before the worst of the tariffs hit. Yet that can’t explain all of it. There are only so many advanced purchases customers can make.  

July was particularly strong this year, rising 4.7% over last year, including clothing stores up 7.4%, furniture and home furnishings stores gaining 5.8%, and nonstore retailers running 8.3% ahead of last year after strong summer sales events led by Amazon Prime Day. Historically, July is one of retail’s stronger months, after May, August and the final three months of the year. 

Early back-to-school shopping also provided tailwinds in July. The NRF projects back-to-college spending will total $88.8 billion this year, up 2.6% over 2024, while BTS will inch up 1.5% to $39.4 billion. 

NRF vice president of industry and consumer insights Katherine Cullen said in a statement, “As shoppers look for the best deals on clothes, notebooks and other school-related items, retailers are highly focused on affordability and making the shopping experience as seamless as possible.” 

Inflation Moderates 

Despite doom-and-gloom predictions about tariffs driving prices higher in retail, the July consumer price index, which measures price inflation, held steady last month – up 2.7% year-over-year and below expectations. 

However, core inflation, excluding food and energy, rose 3.1%, above forecasts. Yet, the core inflation uptick was driven primarily by a 3.6% increase in services, such as shelter, medical care and transportation services, most especially car repair. It excludes energy services, including electricity and utility gas, that rose 7.2%. On the other hand, consumers are getting relief at the gas pump, down 9%, and in fuel oil, off 9.5%. 

In more reassuring news, grocery food prices rose only 2.2%, though food away from home increased 3.9%. In the grocery aisles, eggs experienced the fastest increase, up 16.4% year-over-year, and beef wasn’t far behind, up 11.3%. Rising beef costs contributed the most to the 4.6% increase in meat poultry and fish overall. 

Nonalcoholic beverages increased 3.6%, including a 14.5% rise in coffee. Milk prices rose 2.6% and bread was up 1.3%, while fruit and vegetables were about even with last year, up only 0.2%. 

Commodity prices, excluding food and fuel, rose a modest 1.2%. Commodities are where much of tariffs impact will be felt, and so far, it isn’t showing up. In fact, prices in several categories went down even after 10% across-the-board tariffs went into effect in April, with additional reciprocal tariffs levied thereafter.

For example, in the kitchen, appliances dropped 0.3% and dishes and flatware prices declined 5.6%. Apparel was down 0.2% overall, including women’s and girl’s clothing dropping 0.8%. Information technology prices declined 5.9% with cellphones off 8.8%, and television prices dropped 9%. 

However, prices rose 12.4% in audio equipment, 7.2% for linens, window and floor coverings, 3.2% in furniture and bedding and 3.3% for tires, yet these are typically occasional purchases for most households. 

Credit Card Debt Headwinds

Should increase commodity prices kick in, many American consumers will have to think twice about putting new purchases on credit cards. Credit card debt reached $1.21 trillion in the second quarter, level with the high seen in the fourth quarter 2024, according to the Federal Reserve Bank of New York. 

Credit card debt began its rapid rise in 2022 – it started the year at around $850 billion –  after post-pandemic inflation drove prices through the roof. The New York Fed also reported elevated delinquency rates on credit card debt during the second quarter.

Increasingly, consumers are turning to credit cards when facing inflationary pressures for everyday expenses. A Debt.com survey conducted in March found more than one in three of the 1,000 adults surveyed said “price increases from inflation caused them to use credit cards to make ends meet.” 

The percentage using credit cards to make ends meet was highest among Millennials (43%). This generation also has the highest share who have maxed out their credit cards (42%) versus 32% overall. Millennials are aged 29 to 44 years old this year and are in a highly acquisitive life stage – getting married, starting families and buying first homes.  

“I think most people are generally doing OK, but it wouldn’t take much for them to be not OK,” Matt Schulz, chief credit analyst at LendingTree, told CNBC. “So many Americans are a job loss, income reduction or medical emergency away from real financial trouble.”

Wait And See

Looking to the rest of the year in retail, consumers seem poised to deliver toward the top end of the NRF’s core retail projections between $5.42 trillion and $5.48 trillion, a 2.7% to 3.7% uptick. Strong summer sales, early back-to-school demand and moderating inflation in key categories are providing tailwinds.

Yet, retailers must navigate an increasingly complex consumer landscape, as Americans face mounting economic pressures, including slowing wage growth and rising credit card debt. The yet-to-be-realized impact of tariffs on inflation remains a wildcard.

To keep sales robust, retailers will need to pull strategic levers – maintaining affordable prices, utilizing more targeted and personalized promotions and elevating the customer experience – to stay ahead of the uncertainties and sustain momentum.