Tariffs. Who Really Pays.

The U.S. middle class is more than a household income bracket. The American middle class has always been the heartbeat of the U.S. economy. The symbol of the American Dream. The chance to own a home, raise a family and build a better future. For decades, it represented progress and possibility, a place where hard work translated into stability and the confidence that each generation would do better than the last.

Today, that aspiration is colliding with a harsher reality. Wages are not keeping pace with inflation, which remains stubbornly high. The job market, once the cushion for financial shocks, appears to be softening.

And now, new costs are working their way into household budgets as a result of tariffs that have already started, and will continue, to make many products more expensive and/or harder to get.

This is happening while consumers face higher costs for “basics” like food, clothing, shelter, utilities and insurance than they did just a few years ago, a costly hangover from the lingering effects of record-high inflation in 2022.

The financial strain is starting to show.

The PYMNTS Intelligence July 2025 Paycheck-to-Paycheck research shows that three quarters of lower- to middle-income households, which we define as those earning between roughly $50,000 and $100,000 a year, say they are living paycheck to paycheck. That’s a 10% increase since May and the highest level seen since we began tracking more than 185,000 consumers living paycheck to paycheck starting in 2020. The most recent data is based on a national survey of 2,191 consumers. According to that same report, 71% of U.S. consumers overall report living paycheck to paycheck.

The Backbone of the Economy

The new financial pressures on the middle class matter, though we hardly talk enough about it in dollars and cents terms. Media reports tend to focus on the affluent consumer who is said to be weathering the storm, for now, and the lower-income consumer whose financial stresses are their unfortunate perpetual reality.

Roughly 94 million adults live in households that qualify as middle-income. They represent about a third of all households and drive roughly a quarter of consumer spending.

For decades, the middle class was the steady foundation. They had enough income to cover essentials and still spend on discretionary categories. They were the reliable buyers of everything from restaurant meals to school supplies to home renovations. Businesses priced for them, policymakers promised to protect them and consumers aspired to join their ranks.

The weight of their consumption is why shifts in their financial health ripple quickly across the economy. The latest paycheck-to-paycheck data shows that the middle-income households that once had breathing room now face tighter budgets.

Essentials take up more of their paychecks. Inflation has raised the cost of food, shelter and healthcare. Overall, prices have climbed by 22% since March of 2021. Housing affordability has deteriorated as mortgage rates have climbed. Overall housing costs have increased by 26% during this same period. Borrowing costs are higher across credit cards and auto loans.

Now, tariffs are beginning to add a further layer of price increases across a wide swath of goods.

The Silent Tax

When consumers face higher prices with no increase in income, they trade down. Grocery shoppers shift from branded goods to private labels, families postpone appliance replacements, vacations shrink, restaurants see diners cut back and even healthcare becomes discretionary. Each adjustment looks small, but together they create large-scale economic effects. Retailers, durable goods makers and service providers all feel the drag as dollars flow from discretionary spending to essentials.

PYMNTS Intelligence data finds that bargain shoppers have the biggest impact on spending. Forty-two percent of consumers said they have redirected dollars toward cheaper merchants, sales and discounts. Amazon Prime and Walmart+ Deal days are the latest proof, where more consumers came for the price (47% of shoppers) rather than the brand (10%), a sharp reversal from last year. Consumers fitting a persona we call the Minimalist, some 37% of grocery shoppers and 70% of diners, are now eating more at home and also trimming discretionary purchases.

Tariffs amplify this shift. They are a silent tax that households and businesses ultimately pay. Importers pass the costs on, and consumers encounter them in checkout lanes and grocery aisles. Essentials consume more of the budget, and discretionary categories shrink.

PYMNTS Intelligence data finds that more than 80% of consumers have already adjusted their spending as they anticipate the impact of tariffs on pricing. They have made nearly five different changes to their shopping behaviors, including buying less overall and delaying purchases. The middle-income consumers are hit the hardest, even more than lower-income consumers, forcing them to cut back, cancel services and delay purchases.

Families feel it in higher costs.

But businesses feel it in thinner margins.

The Business Margin Squeeze

Middle-market businesses face the other side of the tariff pass-through.

A new PYMNTS Intelligence study finds that nine in ten heads of product at middle market firms report higher supplier costs. Not a typo. That’s 90%. Yet they are reluctant to raise prices to their end-consumers aggressively. The reason is simple, those end-customers – businesses and consumers – are already pulling back. Demand is weakening. Nearly three quarters of middle-market goods firms report that demand for their products and services has dropped significantly.

The result is a margin squeeze. Businesses raise prices only a little in an attempt to preserve market share, but not enough to preserve profitability. Margins erode quarter by quarter. The latest release of the PYMNTS Uncertainty Project Report show that firms across industries now cite input costs as their most persistent challenge, alongside softening demand.

Some firms attempt to absorb the costs, reducing profitability to preserve customer loyalty. Others trim product assortments, cutting lower-margin items from shelves. A few attempt to differentiate with premium offerings that justify higher prices. Even those face resistance as those who serve the consumer find middle-income consumers cutting back.

This strategy is not sustainable. Businesses cannot lose money indefinitely. At some point, they must either raise prices more aggressively or thin product selection. Both choices carry risks. Higher prices may further dampen demand. Fewer products may reduce consumer choice and weaken competitive positioning.

Any way you cut it, the tariff bill lands on their desks too. Not as a line item labeled “tariff,” but as a structural pressure on profitability.

An analyst interviewed on Bloomberg TV yesterday morning (August 18) commented that consumers were likely to see stockouts this holiday season, along with higher prices, a trend that she observes has already begun to hit consumers’ pocketbooks.

And this is only August 2025.

The real impact of tariffs on consumers and firms has yet to be seen.

The Wrong Kind of Feedback Loop

The interaction between consumer strain and business pressure creates a feedback loop. Consumers cut discretionary spending. Businesses lose revenue. To protect margins, businesses raise prices or cut offerings. Consumers respond with further spending cuts.

This loop intensifies the paycheck-to-paycheck cycle. Households already on the edge become more vulnerable. Businesses already squeezed find fewer paths to profitability. The middle class and the middle market reinforce each other’s fragility.

Tariffs risk becoming the kind of slow-moving external shock that keeps that loop spinning. Their impact is cumulative, tipping more consumers into paycheck-to-paycheck status over time and keeping them there longer.

The Bottom Line

Tariffs in real life are not abstract policy. Last year the government collected $77 billion. They have already collected $108 billion through June of this year and its estimated that they will collect $300 billion by the end of 2025. That is four times more than was collected in 2024.

Consumers and businesses, not suppliers, pay much of the bill.

This wouldn’t be so bad if tariffs weren’t the only pressure. But they land on top of a middle class already stretched thinner than at any point since 2020. More households are living paycheck to paycheck, with nearly half unsure whether their financial fragility is a matter of choice or necessity.

They move in and out of this status depending on shocks, and tariffs are the kind of steady, slow-moving force that can tip millions from financial stability to financial drain.

Only 23% of those living paycheck to paycheck now say that reducing their spending will break them of the paycheck-to-paycheck cycle. And 22% of them are the middle-class consumer that drives the bulk of consumer spending in this economy. Even cutting back doesn’t seem to be enough.

The third force may prove even more destabilizing. Artificial intelligence and autonomous agents are targeting the very white-collar, mid-skill jobs that have long formed the backbone of middle-class security. Unlike earlier waves of automation that reshaped blue-collar work, agents reach into knowledge work, threatening many of the professions that anchored middle-class prosperity.

Taken together, these forces form a precarious trifecta. The middle class pays more for the goods they need. They have  less stability from the jobs they hold. And they lose confidence in their ability to sustain the lifestyle that once defined their American dream.

But shocks do more than expose weaknesses. They accelerate adoption of tools and models that can make households and businesses more resilient.

COVID forced digitization overnight, a shift that accelerated waves of digital transformation across industries.  The 2008 crisis spurred FinTech innovation and made smartphones and apps the platform for innovation that has changed lives.

Tariffs and AI may now combine to produce another reset, one that favors efficiency, smarter decision-making and business models built for resilience.

The question is not whether tariffs will hurt. They already are. The more relevant question is whether this moment becomes another chapter of erosion or the starting point for reinvention.

History suggests that innovation thrives when market conditions are tested. The middle class and the middle market may be wobbling, but they are also capable of adapting.

What comes next, erosion or reinvention, won’t be decided by hoping or by wringing our hands in despair, but by how quickly households and businesses adapt to pressures that are now very much part of their reality.

How do you see it?

Until NEXT time.

Join the more than 15,000 subscribers who’ve already said yes to what’s NEXT.

The post Tariffs. Who Really Pays. appeared first on PYMNTS.com.