Experts Say Retail Inflation Fears Have Moderated. Don’t Believe It.

The Wall Street Journal reports that the 2.4% (annualized) inflation in retail consumer prices in May was lower than expected and defies “fears that the impact of President Trump’s tariffs would start to show a rise in prices.”

The New York Times says inflation is “muted, with limited effects from tariffs.”

Don’t listen. There’s a lot of reasons why the information for May is not indicative of what will happen the rest of the year.

Here’s why:

When manufacturers abroad increase prices, it takes time to go through the system. Goods ordered today typically don’t get delivered for another 90-180 days. That’s the primary reason why inflation for May is moderate. The products being bought today were ordered and delivered before higher tariffs ever happened.

But there are other reasons.

Brands and wholesalers usually do everything they can to avoid price increases. As long as they’re still selling older inventory that came in at lower tariff rates, they are going to hold off on increasing prices.

The CEOs I talk to in the supply chain are trying to hold the line. They are sharing the cost of the tariffs among manufactuers, wholesalers and retailers so that they don’t have to raise prices. That can work for a little while but it’s not going to work for very long.

There’s also another short-term factor that’s holding prices low. Wholesalers, brands and retailers are bringing out their slow-moving inventory. Because it can be sold at the old pre-tariff price, it’s more attractive now than ever. Those less fashionable, slow-selling products are increasing the supply which is holding prices down. It’s another short-term fix and it won’t last for long.

When It’s Really Coming

Because of timing, the inflation from tariff increases will show up at your local retailer in the third and fourth quarter. You will start to see it in the back-to-school season. It won’t be in school basics that are ordered from manufacturers well in advance, like pencils and uniforms. You’ll see it in discretionary items that are ordered closer to delivery dates, like licensed products or the latest toys.

The fourth quarter is where the real impact will come. That’s when almost no products on store shelves will have pre-tariff prices and increases will be unavoidable.

While tariffs are the main driver of price increases, they aren’t the only driver. The uncertainty around tariffs has made retailers very conservative. They are holding back on commitments to large orders of discretionary items. The things you want most won’t be available to late shoppers or they may be more expensive.

That conservative approach means less excess inventory this year, fewer sale items and fewer day-after items available. That will put upward pricing pressure on retailers and facilitate price increases. Coupled with the increased costs from tariffs, prices can only go in one direction and that’s up.

How Consumers React

Discretionary item sales in many categories were up a lot in April, as was foot traffic in stores. Consumers are advancing their purchases to beat the increases. According to a report from ESW, 58% of Gen Z consumers bought products earlier because of tariff inflation fears.

According to that same report, 70% of consumers will reduce spending when they see price increases from tariffs. The hardest hit categories are electronics followed by fashion products, beauty/personal care and home goods.

Inflation is a self-accelerating phenomenon. The expectation of inflation causes workers to ask for more wages and their employers have to raise prices and the cycle keeps on going. Breaking the cycle is the challenge.

Any basic cost increase including tariffs will push the inflationary cycle. It’s on its way here and you will see it in good time.