American Consumers Pressured as Rising Prices Erase Tax Refunds

U.S. consumers are reportedly facing increased financial pressure as tax refunds peter out.

Economists and executives are warning that this cash crunch comes as fuel costs related to the Iran war impacts the economy, the Financial Times (FT) reported Monday (May 25).

According to the report, tax refunds from President Donald Trump’s budget legislation, averaging close to $3,500 per return, have let Americans continue to spend. Now, however, retailers are preparing for gas prices to trigger a pullback, which could cause slowing growth.

“The tax refunds have been largely erased by the increase in Middle East price pressures,” said Gregory Daco, chief economist at EY Parthenon. “The longer the conflict lasts, the more we move to an adverse scenario where inflation proves more persistent and erodes consumer spending growth.”

As the FT noted, consumers have in recent years been a major growth driver, with strong spending, along with tech investment and robust productivity numbers, helping the American economy expand faster than other developed nations since the pandemic.

“One of the key reasons the economy has remained so resilient to higher interest rates, elevated inflation and repeated shocks in recent years is that households have stayed in solid financial shape, allowing consumers to keep spending even as job and income growth has slowed,” Brian LeBlanc, head of economic analysis at PNC Bank, told FT.

While some retailers have credited tax refunds for increased sales, they also acknowledge that “benefit will be fading over the rest of the year,” as Target Chief Financial Officer Jim Lee said during an earnings call last week.

The report noted that some poorer households, who might have benefited less from Trump’s tax cuts, could already be feeling pressured. While retail sales were up 4.9% in April, much of this was fueled by wealthier consumers, who gained more from the budget bill and spend less of their income on fuel.

The latest sales figures “defined a retail environment where spending growth remained intact at the top line, but consumers appeared increasingly focused on recurring expenses,” as PYMNTS wrote earlier this month.

“You’re getting a disproportionate benefit from these refunds flowing to the households that are least impacted by the inflationary pressures,” Mike Reid, chief economist at RBC, told FT.

“The folks who are feeling the pinch right now and perhaps seeing a little bit more of that stress. … It’s really the middle-income folks,” he added.