The news: While many retailers had a stronger-than-expected start to the year, the macroeconomic environment is becoming more challenging.

Inflation is accelerating. The consumer price index rose 0.5% MoM and 4.2% YoY in May, the fastest pace since April 2023, per the US Bureau of Labor Statistics (BLS). More than 60% of that increase stemmed from a 23.5% jump in energy costs, including a 40.5% surge in gasoline prices. Prices for airfare (26.7%), coffee (17.5%), beef (12.9%), and seafood (6.5%) also rose sharply.

Wages aren’t keeping up. CPI growth outpaced the 3.4% increase in average hourly earnings, resulting in a 0.7% decline in real wages in May—the largest drop since February 2023 and the second consecutive month in which inflation exceeded wage growth, per BLS.

Why it matters: While consumer spending proved resilient in Q1—helped in part by larger tax refunds—that support is fading. Rising energy and input costs, potential new tariffs, and declining purchasing power are creating significant headwinds for retailers.

• The vast majority (86%) of households are concerned about rising gas prices and transportation costs and adjusting their budgets accordingly, per the EY-Parthenon US Consumer Sentiment Survey.
• Those pressures are driving shoppers across income levels to become more deliberate value seekers as they shift purchase frequency, scrutinize unit prices, and manage portion sizes, with the most pronounced shifts among lower-income households, per Ipsos Consumer Tracker.

Those behavioral changes are already showing up across categories.

Warehouse clubs like Costco and Sam’s Club cite increased traffic at gas stations as consumers go out of their way to find lower prices. Walmart CFO John David Rainey noted that many shoppers are topping off rather than filling their tanks, with average purchases falling below 10 gallons per trip.

Lower-income consumers are pulling back more broadly. McDonald’s promotions and value offerings are helping it regain some price-sensitive customers, but its core low-income base continues to erode.

Consumers are spending more cautiously overall. Campbell’s snacks business had a 4% fall in organic sales as shoppers traded down to cheaper alternatives.

In response, many retailers are taking a more conservative approach to inventory. Even companies like Chewy, e.l.f. Beauty, and TJX are issuing cautious guidance despite strong sales and clear value propositions. Chewy, for example, lowered its net sales outlook to $13.4 billion to $13.55 billion from a prior range of $13.6 billion to $13.75 billion, even after reporting record quarterly profit and adding 200,000 net new customers.

Implications for retailers, brands, and marketers: If prices continue to climb—which appears likely as long as the conflict in the Middle East persists—and wages don’t keep pace, shoppers’ purchasing power will come under further pressure.

That increases the urgency for retailers and brands to deliver clear, tangible value to increasingly selective shoppers. That can take many forms—from sharper pricing and promotions to more targeted messaging and loyalty incentives—to give consumers a compelling reason to spend.