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Investing.com - Elevated U.S. tariffs could spark inflation that will slow spending more for lower income cohorts than those making top-end salaries, according to analysts at Morgan Stanley (NYSE:MS).
In a note to clients, the analysts led by Michael Gapen said that the first signs of a pass-through of tariff-related costs into price growth are beginning to emerge.
Against this backdrop, they anticipate that overall consumption expenditures will decelerate in the third quarter as inflation speeds up, and "then [trough] in the fourth quarter." The comments echo recent concerns from many economists, who have argued that the Trump administration’s aggressive tariff policies will drive up inflationary pressures and weigh on wider economic activity.
However, the Morgan Stanley analsyts said that people in the upper income cohort, who account for roughly 40% of all consumption in the U.S., "will be relatively more resilient than the lower and middle income cohorts."
This is likely to be due to people on higher incomes typically experiencing "less inflation" than the the other cohorts, the analysts said, adding that a front-loading of expensive car purchases earlier this year could provide further insulation for upper income groups from the levies.
"[C]hanges in net wealth have greater influence on [the upper income cohort’s] spending and they could continue to see supportive wealth effects" from recently frothy equity market valuations, the analysts also noted.
They cited figures showing that, in 2017-2018, lower income groups experienced inflation that was about 40 basis points higher than the top cohorts -- even though the average tariff only rose by 30 basis points in roughly that time period. From 2011-2016, lower incomes encountered about 11 basis points more inflation on average than top-tier incomes, they said.
The upper income cohort is "less reliant" on labor market salaries for consumption as well, giving them the ability to weather possible slowdowns in job demand, the analysts flagged.
"In our view, the data support the conclusion that tariffs act as a regressive tax on household consumption, weighing proportionately more on low- and middle-income household spending than upper-income households," they wrote. "This informs our view that growth in U.S. economic activity will slow, but the limited hit to upper income households means the economy can avoid a recession."
The comments come after the United States and European Union reached a landmark trade agreement over the weekend that includes a 15% tariff on EU goods entering the U.S. The deal averts a possible tariff war between the two major trading partners with only days to go before August 1, when heightened U.S. "reciprocal" tariffs on a range of countries are due to take effect.