Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
Accelerating inflation, partly driven by President Donald Trump’s import tariffs, is creating a significant divide within the US economy, disproportionately impacting lower and middle-income households. Government data and consumer experiences suggest businesses are increasingly passing these costs onto consumers, leading to a “two-tier economy” where essential goods like groceries and clothing are becoming notably more expensive for many Americans.
Inflationary Pressures Emerge
Government data points to the early stages of businesses transferring the costs of President Trump’s sweeping import tariffs to consumers. While overall inflation remains below its peak, a debate continues regarding the extent to which tariffs will lead to a sustained rise in prices.
Labor Department data from August showed prices for several tariff-exposed products ticking up. Clothing prices rose 0.5% from the previous month, while grocery prices increased 0.6%, with coffee, a product sensitive to tariffs, seeing particularly strong gains.
Economists also note that growth in food prices, which can be volatile, might be influenced by the Trump administration’s immigration policies. Mass deportations could suppress the workforce in the food and agriculture sectors, thereby boosting labor costs.
Consumer Experiences Highlight Disparity
Yanique Clarke, a nursing student in Manhattan identifying as lower-income, reported “drastically high” prices for meat, vegetables, and fruit at grocery stores. She also found back-to-school shopping for her 13-year-old daughter to be “very much higher compared to previous years.”
Ernie Tedeschi, director of economics at the Yale Budget Lab, stated that “lower-income households are almost tailor-made to be exposed to tariffs.” He explained that these households tend to spend a larger portion of their budget on imports, particularly lower-priced goods from China that have borne a significant burden of tariffs.
A Yale Budget Lab report from earlier this month indicated that, as of June, core goods prices were 1.9% above pre-2025 trends. This suggests that tariffs are contributing to higher prices for basic products such as window coverings, appliances, and electronics.
Corporate and Broader Economic Insights
Corporate executives are observing this consumer divide. McDonald’s CEO Chris Kempczinski recently warned that while higher-income Americans continue to spend freely, middle and lower-income consumers are “feeling under a lot of pressure.” This insight is partly why the fast-food chain is expanding its value menu to attract price-conscious customers, reflecting what Kempczinski described as “really kind of a two-tier economy.”
Middle-income consumers are also adjusting their spending habits. Nancy Garcia, who works in the publishing and gifts industry in Manhattan, now engages in “more price comparison” for groceries and clothing, noting that even supermarkets have become “really expensive.” Sylvia Sealy, a part-time nurse in Brooklyn, shares a similar sentiment, lamenting what she views as skyrocketing prices for various goods and actively seeking out better deals.
Broader economic data supports these observations. Census Bureau data revealed that inflation-adjusted household income rose last year only for the highest earning households, with no statistically significant changes for those in the low and middle-income brackets. Furthermore, a Boston Federal Reserve study from last month found that low and middle-income consumers are carrying higher levels of credit card debt than before the coronavirus pandemic, with wealthier Americans increasingly driving the consumer economy.
A Bifurcated Consumer Landscape
Ryan Sweet, chief US economist at Oxford Economics, noted that while the overall consumer economy appears reasonably robust, those with less of a savings cushion are particularly vulnerable to the impact of tariffs. He concluded that “when you peel back the layers of the onion, it’s clear that we have a very bifurcated consumer.”
