Tariffs raise prices, cut spending for US households

A new Federal Reserve study quantifies the impact of the 2025 U.S. tariffs on household spending, revealing a significant divergence between price and expenditure responses.

The research estimates a 15 to 20 percent price pass-through to retail prices, meaning a one percentage point increase in the tariff rate raises retail prices by approximately 0.15 to 0.20 percentage points.

However, at the mean increase in tariff exposure, prices rose by only 1 to 2 percent, while real household spending on affected categories plummeted by roughly 4 percent.

This substantial spending contraction is three to four times larger than the implied price increase, indicating that households curtail purchases of tariff-exposed goods well beyond what price changes alone would predict.

The study also refutes stockpiling as an explanation, noting that the spending contraction is consistent in both initial and steady-state post-tariff months, with anxiety about tariffs outweighing any anticipatory buying.

The research reveals a significant distributional impact, with low-income households bearing a disproportionate price burden.

These households face welfare losses of approximately 0.19 percent of income, significantly higher than the 0.02 percent for high-income households.

While all income groups contract spending on tariff-exposed goods, their adjustment mechanisms vary.

Middle-income households primarily reallocate spending towards essentials and trade-down to cheaper varieties within categories, leveraging their discretionary spending capacity.

In contrast, low-income households largely absorb tariffs through higher prices on existing purchases, possessing limited flexibility to restructure their consumption baskets.