tariffs, holiday shopping, back-to-school

Price sensitive shoppers are using mobile devices to secure best deals as consumer pull back discretionary spending.

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Two-thirds of American consumers are cutting back on discretionary spending as tariff concerns reshape retail landscapes ahead of the critical back-to-school and holiday seasons. Middle-income suburbanites are now joining traditionally price-sensitive lower-income households in the high-concern zone. Retailers face a fundamental shift that threatens discretionary categories from apparel to home décor while creating opportunities for value-focused retailers in the discount and warehouse club sectors.

The shift represents more than typical inflation concerns. Despite only 38% of surveyed consumers expecting tariffs to negatively impact them personally, widespread behavioral changes are already underway. “This indicates a preemptive behavioral shift driven by expectations of higher prices rather than actual price changes,” stated Aditya Kaushik, analyst for Coresight Research. The disconnect between perception and direct impact signals a consumer psychology that could reshape retail performance through the fourth quarter.

Inflation Data Points to Continued Pressure

While the Consumer Price Index (CPI) showed a slower rise in prices for July at 0.2% compared to June’s 0.3%, the underlying pressures on consumer budgets continue to mount. On a rolling 12-month basis ending July 2025, food and shelter costs have surged 2.7% and 3.7% respectively, while energy services, including utilities and electricity, spiked 7.2% year-over-year. Though gasoline prices declined 9.5%, the essential category directly impacts discretionary spending power. Commodities, less food and energy, rose 3.1% year-over-year, setting the stage for back-to-school and holiday purchasing decisions driven by reduced discretionary capacity.

Middle-Income Shoppers Drive Discretionary Decline

The most striking shift in consumer behavior is not coming from traditionally price-sensitive lower-income households but emerging from middle-income suburbanites who typically drive holiday spending. Sixty-six percent of consumers state they will spend less this year, with two-thirds of affected consumers cutting back on discretionary purchases across apparel, beauty, home décor, and department store sectors.

“Traditionally, tariff and inflation shocks are assumed to disproportionately affect lower-income households, but our data shows middle-income suburbanites are now in the high-concern zone,” stated Kaushik. This demographic shift requires retailers to recalibrate segmentation models and treat these households as at risk for reduced discretionary spending. “It is not about abandoning premium lines, but it is about creating a ladder of options that keeps middle-income shoppers engaged instead of trading out to competitors.”

Retailers Accelerate Pricing Ahead of Tariff Impact

Many retailers have not issued widespread price increases on products that were brought into the country before tariffs took effect. However, going into the third and fourth quarters of this year, many retailer have to raise their prices, creating a complex supply chain dynamic that will intensify through the fourth quarter.

“When Trump announced his world wide assault on global trade in early April, importers and retailers, faced with the tariffs their arriving goods would be burdened with, did one of two things: they accelerated receipt of merchandise inbound to the U.S., to avoid impending tariffs, and, in some cases, they held arrival of goods off not knowing what actual tariff rates would be imposed,” explains Mark A. Cohen, former director of Retail Studies at Columbia Business School. However, going into the third and fourth quarters of the fiscal year, starting with August back-to-school shopping, shoppers may experience broad price increases across categories as this inventory buffer diminishes.

Private Label Emerges as Inflation Hedge

Larger retailers have responded to consumer price sensitivity by aggressively expanding private label options, with Costco leading the charge through its Kirkland Signature brand strategy. The private label powerhouse now accounts for 30% of Costco’s annual sales, with Kirkland Signature sales growth outpacing overall company performance.

“We continue to move more Kirkland Signature product sourcing into the countries or regions where the items are sold, and this has helped bring us to lower costs and mitigate some of the potential impacts of tariffs,” explained Costco CEO Ron Vachris in the most recent third-quarter earnings call. The strategy is delivering results: Costco experienced an 8% increase in net sales from the prior year’s third quarter, with membership income up 10.4% year-over-year, demonstrating how private label can serve as both a consumer value proposition and a margin protection strategy.

Made In America Sentiment Outpaces Spending Reality

A growing consumer demand for Made in America products has emerged in survey data, with shoppers expressing increased interest in domestically produced goods. While this trend may appear to present a market opportunity for retailers considering local sourcing strategies, the gap between consumer intent and actual purchasing behavior remains significant. “Intent does not always equal spend,” cautions Kaushik. Retailers looking to capitalize on patriotic purchasing sentiment need concrete evidence of conversion. “To separate real demand from aspirational sentiment, retailers should test-and-learn with controlled product rollouts, introducing American-made lines in select stores and tracking conversion, repeat purchases, and price elasticity,” said Kaushik. The key is determining whether Made in America products drive consistent purchasing patterns or represent mere signaling of patriotic sentiment.

Holiday Strategy Shifts Toward Value and Early Engagement

The traditional holiday shopping landscape faces a fundamental reset as consumer anxiety drives both earlier purchasing decisions and heightened price sensitivity. In anticipation of higher prices, 53% of survey respondents have modified their shopping behavior through three key strategies: cutting back on luxuries and non-essentials, increasing demand for American-made goods, and stockpiling before anticipated price rises, particularly among men, urban, and high-income groups. “We expect an early, deal-driven holiday season with sharper competition for every discretionary dollar. Off-price, mass merchandisers, and warehouse clubs will likely outperform due to their value for money deals, while weakness will remain in department stores and some specialty apparel retailers unless they aggressively target value perceptions,” said Kaushik. The shift is already impacting retailer policies as Target announced it will end its price matching of products sold for less at competitors’ stores and websites. “Retailers should prioritize value-packed products and doorbuster events starting early and market to high-income households that still have discretionary capacity,” explains Kaushik.

Retailers Recalibrate For Holiday Shopping

The convergence of tariff anxiety and inflation reality is forcing retailers to fundamentally recalibrate their customer segmentation models. With middle-income suburbanites, traditionally the backbone of discretionary spending, now exhibiting price-sensitive behaviors, successful retailers must create product assortments with choices in a variety of price points rather than abandoning premium positioning entirely. The winners in this environment will be those who recognize that 2025’s holiday season begins with back-to-school results, using early performance data to adjust value messaging and promotional intensity before the critical fourth quarter arrives.