Inflation's Next Wave: How Tariffs Will Reshape Consumer Discretionary in 2025

The latest inflation data paints a nuanced picture: U.S. consumer prices rose 2.4% year-over-year in May 2025, with core inflation (excluding food and energy) holding steady at 2.8%. . Yet beneath this calm lies a ticking time bomb: delayed pass-through effects of tariffs that could ignite a wave of price hikes in the second half of 2025. For investors, this bifurcates the market: defensive stocks offer shelter, while retailers and manufacturers face headwinds.

The Tariff Lag: Why Inflation Is About to Accelerate

The Federal Reserve's preferred inflation metrics have stayed below its 2% target, but this masks a critical dynamic. Tariffs imposed earlier in 2025—particularly on goods like steel, textiles, and consumer electronics—have yet to fully materialize in consumer prices. Companies initially absorbed costs through leaner margins, but this buffer is eroding. . The Producer Price Index (PPI) signals the shift: while energy prices have fallen, tariffs on intermediate goods like steel (+5.9% monthly in March) are now forcing businesses to choose between trimming margins or passing costs to consumers.

J.M. Smucker: The Canary in the Tariff Coal Mine

Consider J.M. Smucker (SJM), a bellwether for consumer staples. In May, the company announced a 5% price hike on its coffee, jelly, and peanut butter products. This followed a 3% increase in late 2024. . Smucker's move isn't just about tariffs—it's a preview of how companies in sectors like packaged foods, apparel, and electronics will respond. The question isn't if prices will rise, but how aggressively.

Sector Split: Defensives Rise, Discretionaries Struggle

The implications are clear: defensive sectors like utilities (XLU), healthcare (XLV), and consumer staples (XLP) will outperform. These industries have pricing power and inelastic demand, shielding them from tariff-driven volatility. Conversely, consumer discretionary stocks—retailers like Walmart (WMT), Target (TGT), and automotive companies—face a squeeze. . Margins will thin as retailers pass costs to consumers, potentially reducing demand in discretionary categories like apparel or home goods.

Investment Playbook: Hedge Inflation, Short the Sensitive

1. Buy Inflation-Protected Assets: Treasury Inflation-Protected Securities (TIPS) and real estate investment trusts (REITs) linked to inflation metrics offer a hedge. Consider iShares TIPS ETF (TIP) or Vanguard Real Estate ETF (VNQ).
2. Short Tariff-Sensitive Equities: Retailers and manufacturers exposed to tariff-hit supply chains are prime candidates. Shorting ETFs like Consumer Discretionary Select Sector Fund (XLY) or individual stocks like Nike (NKE) could profit from margin pressure.
3. Focus on Pricing Power: Consumer staples firms with global sourcing flexibility, like Coca-Cola (KO) or Procter & Gamble (PG), can mitigate tariff impacts through scale and brand loyalty.

The Bottom Line

The second half of 2025 won't just see inflation—it will see a reckoning. Companies that delayed pricing are now cornered, and consumers will feel the pinch. Investors who position for this reality—by favoring defensive sectors and hedging against inflation—will navigate the storm. For those clinging to discretionary stocks, the tariff tide may yet wash away gains.

. The writing is on the wall: inflation isn't dead—it's just been delayed. The question now is whether you're prepared for its resurgence.