When major retailers cut prices, it indicates consumers can no longer afford goods, leading to demand destruction. This squeezes corporate margins, forcing layoffs to control costs. The resulting job losses further reduce consumer spending, triggering a deflationary spiral across the economy.

A restaurateur reveals the dramatic, unseen impact of inflation. While he raised the price of his fries from $9 to $12 since 2019, maintaining the original profit margin would require charging $25 today. This illustrates how businesses are absorbing massive cost increases, squeezing their profitability.

Instead of immediately passing tariff costs to consumers, US corporations are initially absorbing the shock. They are mitigating the impact by reducing labor costs and accepting lower profitability, which explains the lag between tariff implementation and broad consumer inflation.

Unlike 2022, when stimulus savings allowed consumers to absorb price hikes, the financially depleted middle class now lacks the ability to pay more. This forces them to push back on price increases, creating significant consumer resistance that acts as a powerful, albeit painful, check on a new round of inflation from tariffs or other cost pressures.

Post-pandemic, companies have shifted from setting prices on a fixed schedule to "state-dependent pricing." They now adjust prices more frequently in direct response to rising costs, causing inflation to pass through to consumers more quickly and persistently.

Companies are avoiding layoffs but have exhausted all other cost-cutting measures: slowing hiring to near-zero, cutting hours, and reducing temp staff. This "firewall" against recession is the only thing holding up the labor market, but it leaves businesses with no other levers to pull if demand weakens further.

Unlike in 2021-2022, companies are now more reluctant to raise prices. Key factors include consumer resistance after high inflation, anchored inflation expectations, political scrutiny, and significant uncertainty over tariff policies, which makes firms fear losing market share if they act prematurely.

Kai Ryssdal explains that the current rise in consumer prices is a lagging effect of tariffs. For months, businesses absorbed these costs to protect market share. Now, with squeezed margins, they are forced to pass the costs on to consumers, resulting in a delayed but significant inflationary impact.

Unlike the 1970s oil crisis, today's energy shocks cause demand destruction because consumers are weaker. In the 70s, people had decades of real wage growth. Today, after decades of wage stagnation, consumers have no financial cushion, forcing them to cut spending immediately when prices rise.