Consumers still spending despite simmering inflation

Trend watch

As summer continues to fade, travel-related activity is gradually fading as well. Meanwhile, freight container volumes at the top two U.S. ports – the twin Los Angeles and Long Beach – surged 23% in July and are up 7.6% year-to-date compared to the same period in 2024. 

Our take

We’ve consistently highlighted data distortions because of tariffs for the better part of six months. Regrettably, the most recent set of economic indicators—including the two primary inflation measures, retail sales, and consumer sentiment—did little to provide clarity. In fact, it probably did more to confuse and bewilder folks, especially those that are fixated on “who’s eating the tariffs?” along with those looking to prove or disprove that tariffs are pushing up prices (aka inflation). In our view, there are simply too many distortions to definitely prove or disprove the impact of tariffs at this point.

Tariff-related distortions to both supply and demand remain apparent, causing meaningful swings in inventories, which, in turn, impacts pricing. Specifically, inventory front running earlier this year has thus far suppressed near-term inflation, while surges in purchases have contorted sales, particularly on a month-to-month basis. It is also cycling through freight volumes handled by U.S. ports, rail, air cargo, and trucking.

Consumer demand remains resilient according to multiple spending indicators despite higher prices, with minimal evidence suggesting significant shifts in savings. Here, too, consumers pulled forward purchases, particularly big-ticket items such as autos and smartphones.

Furthermore, there are seemingly new distortions from the new tax deal, which have vastly different implications depending on factors such as income level, sourcing location, etc., and vary even within broad industry groups. Within energy, for example, sentiment among crude oil & natural gas producers is high, while wind & solar are gloomy. Or used versus new vehicle sales as the latter now have new tax incentives for consumers.

Meanwhile, overall inflation has been suppressed thus far by a variety of factors, including earlier tariff front running of inventories, shifting between suppliers to lower tariff locations, and a lower percentage of goods subject to tariffs. This makes it difficult to determine “who’s eating the tariffs” at this point.

However, indications of tariff-related price increases are becoming more apparent, particularly in categories that rely heavily on imports such as home furnishings and appliances. Thus, prices will likely increase due to tariffs. While painful, that won’t be catastrophic.

Similarly, there are too many distortions to pinpoint exactly where demand will be in the future in our opinion.

Bottom line

The U.S. economy remains in a muddle-through environment. Economic data will continue to jostle due to air pockets as demand normalizes following accelerated purchases by consumers and businesses attempting to front-run tariffs. While we don’t believe that tariffs will be catastrophic for the U.S. economically, they will certainly continue to distort behaviors and, in turn, the economic data.