Tariff Uncertainty May Cause Young, Wealthy Consumers to Curb Spending
Last quarter’s holiday shopping might have represented a burst of consumer optimism at the register that has now been dampened.
The souring sentiment is in evidence among young, affluent consumers, who have been the drivers of commerce online and offline. They’re worried in the face of tariffs and job uncertainty. By extension, merchants’ fortunes are also murky.
An Almost 10% Slide
The University of Michigan released its Consumer Sentiment Index Friday (Feb. 21), with its readings for February built upon January’s somber start to the year. The headline number, which was down 3.1% in January, dropped nearly 10%. The dip, down to 64.7 overall, is about 16% lower than it was last year. The January and February slides wiped out the cumulative 5-month gain in sentiment that had been in place since the end of the summer.
Within the index, both the assessment of current conditions and expectations for the future worsened at a similar rate, with the former dipping by 12.5% monthly and the latter doing so at a rate of 7.9%.
Inflation Outlook
February also showed a worsening of inflation expectations. Year-ahead inflation stands at 4.3% this month, a full percentage point above the 3.3% expectation from January, which was higher than the December average of 2.6%. The reading is the most pessimistic since November 2023. Long-run inflation expectations also rose from 3.2% last month to 3.5% this month. This is the largest month-over-month increase seen since May 2021.
“For both short- and long-run inflation expectations, this month’s increases were widespread and seen across income and age groups,” Surveys of Consumers Director Joanne Hsu said in a statement.
The decline in sentiment was also universal across demographics.
Expected Change in Prices
As for where the spending pressures might lie, Friday’s report indicated that there was a “19% plunge in buying conditions for durables, in large part due to fears that tariff-induced price increases are imminent,” Hsu said.
The University of Michigan report builds on a January report from The Conference Board, which gives the read-across that young, affluent consumers may pull back more than they have been after a month that saw retail sales dip more than expected. The Conference Board survey showed that young consumers — those below the age of 55 — with incomes above $125,000 had the largest declines in confidence, and expectations for the job market fell for the first time since last fall.
The Tariff Effect
The fourth quarter of 2024 may prove to be a high-water mark, as consumers scrambled to get what they needed, and, in effect, stock up.
Karen Webster wrote in a column Wednesday (Feb. 19) that 57% of consumers surveyed by PYMNTS Intelligence anticipate at least some impact to their financial standing (and purchasing power) as a result of tariffs that are already being put in place as well as those that have yet to be implemented. Three-quarters see higher prices on the horizon.
In describing the fact that consumers have at least some “time to plan their next moves,” Webster said a wait-and-see mindset might dominate retail in the weeks and months ahead.
There may be some room to keep spending. The PYMNTS Intelligence report “Average Credit Debt Hits More Than $7,000 for Financially Struggling Cardholders” estimated that the average credit card limit for high earners — those annually earning more than $100,000 — stands at more than $9,500, and they average about $6,000 in outstanding debt, indicating a moderate level of dry powder. But caution rules the day, at least for the moment.
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