What: US consumers are facing reduced spending power as the effects of Trump-era tax rebates diminish, intensifying pressure on retail demand.

Why it is important: The trend underscores the growing divide in consumer segments, compelling retailers to refine inventory, pricing, and engagement strategies.

As the temporary boost from Trump-era tax rebates fades, US consumers are experiencing a notable reduction in disposable income, which is beginning to weigh heavily on retail demand. The resulting squeeze on household budgets is prompting a clear shift in consumer behavior, with many shoppers prioritising essentials and seeking greater value in their purchases. This environment is particularly challenging for mid-market retailers, who must now adapt to a more price-sensitive customer base while also contending with ongoing inflation and a cooling labour market. Discount and value-oriented retailers are seeing increased foot traffic and sales, as even higher-income consumers become more selective in their spending. Meanwhile, premium and luxury segments continue to attract affluent shoppers, further widening the gap between consumer groups. Retailers are responding by optimising inventory, refining pricing strategies, and enhancing customer engagement to maintain relevance and profitability in a market defined by economic uncertainty and evolving consumer priorities.

IADS Notes: In January 2026, The Wall Street Journal reported a 0.2% decline in US retail sales, reflecting increased consumer caution as inflation and a cooling labour market reduced disposable income. By March 2026, BoF highlighted Macy’s CEO describing an “e-shaped” economy, with middle- and lower-income households focusing on essentials and value, while upper-income consumers maintained discretionary spending. In December 2025, the Financial Times noted strong sales growth at Dollar General and Dollar Tree, as affordability concerns drove shoppers from all income levels to discount chains. The Economist, also in December 2025, observed that despite low consumer sentiment, retail spending remained robust, particularly among higher-income shoppers and at both luxury and value retailers. Finally, Forbes in September 2025 emphasised that stalled job creation, tariffs, and inflation were pressuring retailers to adopt leaner inventory strategies and operational efficiencies to navigate ongoing economic challenges.

US consumers face looming spending squeeze as Trump tax rebates fade