U.S. Inflation Trends And Consumer Behavior

By Jharonne Martis of Lipper Alpha Insight

Monday, August 25, 2025 3:08 PM EST

The COVID-19 pandemic disrupted global supply chains and labor markets, initially keeping inflation subdued due to weak demand and widespread lockdowns. However, by mid-2021, inflation began to accelerate. The Consumer Price Index (CPI) rose from 1.7% in February 2021 to over 5% by June 2021, driven by strong consumer demand, supply chain bottlenecks, and expansive fiscal stimulus. Inflation peaked at nearly 9% in June 2022, the highest level since 1981, fueled by energy price spikes, global supply disruptions, and geopolitical tensions.

Since 2023, inflation has gradually declined, but remains above the Federal Reserve’s 2% target. As of July 2025, the CPI stands at 2.7%, still slightly elevated (Exhibit 1).

Exhibit 1: Consumer Price Index 12-Month Percentage Change

Source: LSEG Workspace

In response, consumers have been adjusting their spending habits. Our same-store sales (SSS) data shows premium brands outperforming, while retailers serving middle- and lower-income consumers are seeing more muted results. For instance, Ralph Lauren has consistently delivered robust SSS growth well above the 3.0% benchmark over the past two years, underscoring how luxury, innovation, and brand strength continue to resonate with high-end consumers (Exhibit 2). A 3.0% comp is generally viewed as a signal of healthy demand and brand resilience.

In contrast, mass-market retailers such as Macy’s, Target, and Dollar General have underperformed, reflecting ongoing consumer caution and a shift toward value among lower-income segments.

Exhibit 2: Same Store Sales: 2023-2025

Source: LSEG I/B/E/S.

In his Jackson Hole speech, Fed Chair Jay Powell signaled a potential shift toward rate cuts, citing rising risks to employment and persistent inflation driven by tariffs. However, he emphasized that any decisions will be data-dependent, and cuts may not dramatically lower long-term borrowing costs such as mortgage rates.

During last week’s earnings call, Home Depot echoed this uncertainty. While short-term rate cuts could help with home equity lines of credit (HELOCs — often used for home improvement), mortgage rates are tied to longer-term Treasury yields, which may not respond as quickly. This means consumer spending on big-ticket home projects might not pick up immediately, even if the Fed begins cutting rates.

Using LSEG’s internal GenAI tool to analyze earnings call transcripts, we captured the following commentary from Home Depot’s Q2 2025 call: “Well, again, we don’t know when those rates will come. There’s clearly expectation that we start to get some cuts in the second half of this year. Remember that the short-term rates, while that will help on a HELOC rate, which is often utilized for larger projects, the mortgage rate is more associated with the 10-year and the longer bond rate.” (Source:Home Depot Earnings Call, Q2 2025)

While two quarter-point rate cuts may not significantly lower borrowing costs, especially for long-term loans, the psychological impact on consumers could still be meaningful. Lower rates often signal that the Fed is prioritizing economic support, which can boost consumer confidence. If people feel more secure about the economic outlook, they may be more willing to spend, particularly on essentials or small discretionary items.

However, recent consumer behavior suggests that value-seeking remains strong, even among higher-income groups. Many shoppers are still trading down to retailers like Walmart or off-price retailers, driven by persistent inflation, rising tariffs and economic uncertainty. So while rate cuts might ease some anxiety, they’re unlikely to fully reverse cautious spending habits. Consumers remain highly price-sensitive and focused on bargains, especially if wage growth stays modest and cost pressures persist.

Walmart’s latest earnings call highlighted this dynamic. As the company replenishes inventory at post-tariff price levels, it has experienced weekly cost increases, an upward trend expected to continue through Q3 and Q4. Walmart is mitigating tariff impacts by absorbing costs where possible, raising prices strategically on select items while keeping others stable.

This underscores a broader shift in consumer priorities: value has become a central driver of purchasing behavior. Shoppers across income levels are increasingly focused on affordability, especially amid persistent inflation, rising tariffs, and economic uncertainty. As a result, value-oriented retailers continue to gain traction. Analysts polled by LSEG are bullish on several discounters and off-price retailers that are well-positioned to thrive in the current environment, including Costco, Walmart, TJX and Ross Stores.

Costco, Walmart, and TJX each deliver compelling value propositions that resonate strongly with today’s price-sensitive consumers. Together, these retailers meet the growing demand for affordability without compromising on quality, an increasingly important factor in an environment shaped by inflation, tariffs, and cautious consumer sentiment. As a result, they have consistently delivered robust same-store sales (SSS) growth well above the 3.0% benchmark over the past two years, underscoring the sustained consumer demand for value-driven retail experiences.

Exhibit 3: Same Store Sales: 2023-2025

(Click on image to enlarge)

Source: LSEG I/B/E/S.

This week in retail

To date, 159 of the 197 companies in our Retail/Restaurant Index have reported their EPS results for Q2 2025, representing 81% of the index. Of those companies that have reported their quarterly results, 72% announced profits that beat analysts’ expectations, while 4% delivered on-target results and 24% reported earnings that fell below estimates. The Q2 2025 blended earnings growth estimate now stands at 6.0%.

The blended revenue growth estimate for the 197 companies in this index is 4.6% for Q2 2025. Of those companies that have reported their quarterly results so far, 71% announced revenue that exceeded analysts’ expectations and the remaining 29% reported that their revenue fell below analysts’ forecasts.

Exhibit 4: LSEG Earnings Dashboard

(Click on image to enlarge)

Source: LSEG I/B/E/S

Strong outlook for Urban Outfitters

Looking ahead to Q2 earnings, analysts surveyed by LSEG are bullish on Urban Outfitters (URBN). The apparel retailer is expected to post a solid 4.7% same-store sales (SSS) increase, driven by strong performances from its Anthropologie and Free People divisions, which are projected to deliver comps of 5.8% and 5.5%, respectively. Both premium brands continue to gain market share, supported by loyal customer bases.

According to our StarMine models, Urban Outfitters scores a 96 on the Price Momentum (PriceMo) Model, indicating strong stock price momentum and a likely continuation of its upward trend (Exhibit 5). The company also ranks in the top quartile for both the StarMine Smart Holdings and Credit models, reflecting growing buy-side confidence and financial strength.

Notably, Urban Outfitters remains in the top decile of the StarMine Credit Model, with scores corresponding to an implied credit rating of AA+ or better. The retailer’s lack of long-term debt on its balance sheet, and strong cash flow further underscore its financial stability and ability to execute on strategic initiatives.

Exhibit 5: Urban Outfitters StarMine Models