Consumers Anticipate Tariff Price Shocks, Adjust Spending

Tariffs have been a hot topic in recent years, with governments worldwide implementing them to protect domestic industries and influence international trade. However, the impact of tariffs on consumers and their spending habits has been a subject of interest. A recent study by the Bank of Canada found that consumers' expectations and behaviors change when they anticipate price shocks due to tariffs, compared to unanticipated price changes.

When consumers anticipate price shocks due to tariffs, they may adjust their consumption patterns inter-temporally or through cross-consumption-item substitution. This means they may spend less immediately before the price shock and more during the sale event, or they may shift their spending towards items unaffected by the price shock. However, consumers who are liquidity constrained or use credit cards may not exhibit this substitution behavior (Cheema, 2003).

In the context of tariffs, consumers may anticipate price increases due to the announced tariffs and adjust their spending habits accordingly. For example, a survey from InMoment found that 83% of consumers believed an increase in tariffs would change their shopping habits, with 60% of respondents saying they would reduce their spending on electronics and eating at restaurants (InMoment, 2018). This suggests that consumers are aware of the potential impact of tariffs on prices and are adjusting their spending habits in anticipation.

Additionally, consumers may exhibit different behaviors depending on their political leanings. The same survey found that conservatives and liberals had sharply different opinions on whether tariff policies would raise prices, with conservatives more likely to believe that tariffs would not significantly impact prices (InMoment, 2018). This suggests that consumers' expectations and behaviors may be influenced by their political beliefs and attitudes towards tariffs.



The key factors influencing consumers' decisions to adjust their spending habits in response to anticipated tariff-induced price increases can be summarized as follows:

1. Income and Financial Constraints: Consumers with lower incomes or those who are financially constrained may be more sensitive to price increases.
2. Budgeting and Category-Specific Budgets: Consumers form category-specific budgets that dictate how much they can spend on any product category. When prices increase due to tariffs, consumers may adjust their spending within these categories.
3. Price Expectations and Reference Prices: Consumers have a "reference price" expectation for most purchases. When prices deviate significantly from these expectations, consumers may adjust their spending habits.
4. Substitution and Availability of Alternatives: Consumers may substitute tariff-affected goods with non-tariffed substitutes if they are readily available. However, if substitutes do not exist or cannot easily be produced in higher quantities due to capacity constraints, tariffs are more disruptive to the real economy and lead to higher inflation.
5. Consumer Confidence and Expectations: Consumers' confidence and expectations about the economy and their personal financial situation can influence their spending habits.

Understanding these factors is crucial for assessing the aggregate impact of tariff policies on the economy. As consumers adjust their spending habits in response to anticipated price shocks, businesses may need to adapt their strategies to accommodate these changes. Additionally, governments may need to consider the potential impacts of tariffs on consumer spending and adjust their policies accordingly.



In conclusion, consumers' expectations and behaviors change when they anticipate price shocks due to tariffs, with some consumers adjusting their spending habits inter-temporally or through cross-consumption-item substitution, while others may not exhibit this behavior. Understanding the key factors influencing consumers' decisions to adjust their spending habits in response to anticipated tariff-induced price increases is crucial for assessing the aggregate impact of tariff policies on the economy. As consumers adapt their spending habits, businesses and governments must also adjust their strategies to accommodate these changes.