Consumer flexibility and market volatility are driving retailers to focus on agility

There are signs that average effective tariff rates may be affecting retail sales and consumer sentiment. Consumers have reacted to changing tariff rates by modifying their spending habits due to concerns that high tariff costs would lead to higher prices, initially decreasing spending due to uncertainty, while later strategically increasing spending to get ahead of delayed tariff increases. The impact of tariffs on consumer prices has been modest so far. As retailers run low on inventory purchased ahead of tariffs, economic conditions may lead to higher costs for businesses.

Consumer spending

Earlier this year, consumers and businesses front-loaded large purchases ahead of tariffs, with motor vehicle and parts dealers’ sales up 5.1% in March from the month before. The data shows the trade-off, with automobile sales dropping 3.8% in May. Retail sales fell 0.8% month over month in May, more than analysts’ expectations of a 0.6% decline, while the control group sales (retail sales excluding food, auto, gas and building materials), rose 0.3%. Additionally, total credit and debit card spending per household (seasonally adjusted annualized growth) declined 0.8% in May, according to Bank of America.

In June, retail sales grew 0.9%, followed by a 0.5% increase in core and headline sales in July, as consumers pulled forward back-to-school purchases before potentially higher tariffs later. Motor vehicle and parts sales increased 1.5%. Headline retail sales show some signs of weakness, while underlying core categories remain more resilient.

As seen in the data, accelerated purchasing to beat tariff deadlines creates demand volatility, which can lead to inventory overhang and forecast challenges for businesses. The constant need to make purchasing decisions based on policy changes rather than personal needs can erode consumer confidence. If consumers become accustomed to strategic purchasing around price changes, they may become more price-conscious in general, waiting for sales and less willing to make impulse purchases. The broader concern is whether these impacts will create a lasting change in consumer behavior, potentially dampening consumer spending even after tariff uncertainty fades.

Consumer confidence

Consumer confidence rose for the first time this year in June, after declining since December 2024. The agreement between the U.S. and China to reduce reciprocal tariffs, along with a 2.6% drop in gasoline costs and lower-than-expected inflation results, led to an uplift in sentiment. Excluding food and energy, core inflation was up 0.2% from the month before. This is up from 0.1% in May but under the 0.3% consensus forecast. Then, consumer sentiment unexpectedly fell 5% on continued concerns about the impact of tariffs.

The underlying economic conditions that persist create headwinds for those results going forward and will continue to create challenges for businesses and consumers.

Tariffs’ impact

Businesses and consumers confront an overall average tariff rate of 18.3%, the highest since 1933, up from 2.4% in early January, according to The Budget Lab at Yale. This is expected to result in an average per-household income loss of $2,400 annually.

Businesses with imported goods have worked to reduce supply chain costs and pull forward inventories, allowing them to continue selling at similar prices. However, as their inventory runs low, businesses will need to replenish their stock at higher costs. Those higher costs are likely to be passed on to consumers in the form of higher prices this summer and fall. For example, The Budget Lab at Yale expects shoe prices to rise 33% and apparel prices to rise 28% in the short run.

For businesses that sell to foreign consumers, such as those in China, the reduction in tariff rates from their earlier highs is welcome news. While most Chinese household wealth is locked up in real estate, China’s retail sales increased by 6.4% year over year in May, the fastest pace since December 2023, as government subsidies helped reduce the impact of U.S. tariffs, according to Trading Economics.

The weakening dollar

Additionally, the value of the dollar has dropped 8.3% since the beginning of the year. A weaker dollar means businesses need more cash to buy the same amount of imported inventory. The combination of a declining dollar and the need to restock creates a double bind. Companies may be forced to rebuild inventories at higher costs before currency declines further, precisely when consumer demand is weakening and cash flow is diminished.

Should businesses buy now what they typically would, but risk tariff rates going lower or the dollar’s value  rebounding? Or do they wait and risk tariff rates going higher and the dollar’s value decreasing, which could lead to businesses running out of inventory?

In the current environment of slowing consumer spending, businesses may face both higher inventory costs and slower inventory turnover.

All of these factors could lead to reduced profit margins, decreased inventory selection, potential supply chain shortages if businesses delay, and pressure on businesses to raise prices, which could further dampen consumer demand.

Takeaways and considerations

To mitigate challenges due to rising costs and volatile consumer demand, retail and restaurant companies should:

• Use forward contracts to lock in exchange rates for future inventory purchases, to remove uncertainty around dollar fluctuations.
• Leverage technology such as artificial intelligence and automation to improve operational efficiency, commercialization and product development.
• Consider nearshoring to countries with currencies more closely tied to the dollar, such as Mexico.
• Consider prioritizing higher-margin and faster-moving inventory to improve cash flow. For restaurants, use dynamic menus and tiered pricing strategies such as happy hour specials and weekday lunch deals to capture price-sensitive customers while still maintaining premium pricing during peak demand periods.
• Leverage social media and community engagement to build brand loyalty through local event partnerships and chef interactions that create emotional connections beyond price competition.
• Reduce food waste through improved forecasting that enables automated inventory replenishment based on demand trends rather than fixed schedules.
• Continue to diversify supply chains by sourcing imports from multiple countries or developing domestic suppliers, such as local farms, where feasible.
• Create seasonal menu offerings that capitalize on lower-cost, peak season ingredients.
• Partner with delivery platforms to expand revenue channels and customer convenience. Offer meal kits, catering services and private dining experiences to diversify income beyond traditional dine-in services.

Slower real wage growth, depleted excess savings, rising credit card debt, elevated interest rates and concerns about rising prices and inflation are leading to volatility in consumer spending. Businesses are trying to balance these changes in spending and the rising costs of inventory with continued trade uncertainty and the strategic imperative to not lose margin or market share.

This leads to the difficult choice between raising prices to protect margins, which risks further demand destruction, or absorbing higher costs to maintain market share but potentially sacrificing profitability. In an environment of weakening demand, this decision becomes even more difficult because there is less volume to spread fixed costs across the business.

In the current economic climate of higher interest rates, increased complexity and a competitive market, businesses must examine and plan all of their company processes holistically to remain competitive. Leaders must develop processes that factor in these interdependent components to ensure they have the accurate and comprehensive insights needed to make quick and impactful adjustments to their business. They must understand where they have margin to be lean and make just-in-time decisions, and where they lack flexibility and face greater competition for inventory, necessitating more conservative action.