Tariffs ‘starting to show up’: how Trump’s strategy could increase back-to-school costs

New tariffs, largely effective in August, are beginning to impact consumer spending, with a National Retail Federation survey indicating 72% of parents expect higher back-to-school prices, contributing to an estimated $39.4 billion in total spending. Despite retailers' efforts to absorb costs, analysis from Goldman Sachs shows consumers bear a significant portion of tariff burdens, leading to rising inflation since April and prompting concern from the Federal Reserve, which anticipates further pass-through to consumers. This suggests ongoing inflationary pressure from trade policies.

Analysis

The phased implementation of new tariffs is creating tangible headwinds for the U.S. consumer and retail sectors, with a direct impact on inflationary pressures. According to a National Retail Federation survey, 72% of consumers anticipate higher prices for the back-to-school season, prompting 12% to start shopping earlier, contributing to a record spending forecast of $39.4 billion. While some retailers like Target (TGT) are strategically absorbing initial costs on select items to preserve market share, this is viewed as a temporary measure. An analysis from Goldman Sachs (GS) quantifies the pass-through effect, estimating that consumers ultimately bear 67% of tariff costs within four months. This trend is now appearing in macroeconomic data, with inflation rising since April and drawing explicit concern from the Federal Reserve. Fed Chair Jerome Powell has noted that tariffs are beginning to manifest in consumer prices and that companies intend to continue passing these costs on, signaling a direct link between current trade policy and a potential acceleration in inflation.

Key Decisions for Investors

• Investors in the retail sector should scrutinize company-specific pricing strategies and gross margins, as firms like Target attempting to absorb tariff costs may gain market share at the expense of near-term profitability.
• Given the Federal Reserve's acknowledgment that tariffs are fueling inflation, a more hawkish monetary policy stance could emerge if these price pressures persist, creating potential headwinds for fixed-income and growth equities.
• While headline back-to-school spending figures appear robust, the underlying driver is inflation rather than increased demand, warranting caution on consumer discretionary stocks as higher essential costs may curb future consumption volumes.
• Portfolios should remain hedged against trade policy risk, as the current environment introduces volatility and margin pressure for companies with significant import exposure, particularly from China.