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Rising cost pressures on low-income consumers could erode retail sales

The situation: Low-income consumers face mounting financial strain and are cutting spending as their after-tax wage growth slows, according to a recent Bank of America Institute report.

This pullback is showing up in earnings calls. For example, McDonald’s noted that low-income consumers are thinking twice before pulling into a drive-thru—a broader industry trend as US QSR traffic among this group was down by nearly double-digit percentages YoY.

Looking ahead: The pressure is unlikely to ease soon.

  • Prices are rising. Last week, Walmart warned shoppers could see price hikes by month’s end, as elevated tariffs threaten its “everyday low prices” model. In response, President Donald Trump posted on Truth Social that Walmart should “eat the tariffs”—a rare admission that tariffs squeeze margins and lead to price increases. The following day, Treasury Secretary Scott Bessent acknowledged the retailer may need to pass some of those costs on to consumers.
  • Policy offers little relief. Over the weekend, Republicans pushed what Trump is calling their “big, beautiful bill” through the House Budget Committee, setting it up for a Rules Committee hearing on Wednesday. The bill, which contains much of the Trump administration’s legislative agenda, would extend current tax rates and avoid a scheduled increase at year’s end.

Zooming in on the policy: While many analyses suggest the bill could lower taxes for many Americans, it could actually reduce after-tax income for lower-income households, intensifying financial pressures on those already most vulnerable.

A Penn Wharton Budget Model analysis examined both the proposed tax cuts and the spending reductions needed to fund them—including deep cuts to programs like Medicaid and SNAP. The results were stark:

  • Those earning between $17,000 and $51,000 could lose an average of $705 in after-tax income starting in 2026, with losses growing over time.
  • Those earning less than $17,000 would lose $1,035 next year—underscoring their reliance on federal assistance.
  • Meanwhile, the top 0.1%—individuals earning more than $4.3 million—would see an average increase of over $389,280 in after-tax income in 2026.

The findings point to a growing concern: The long-term effects of the bill may widen the economic divide rather than narrow it.

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