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The American consumer appears to have bounced back with a force.

Powered by trillion-dollar tax cuts and a strong jobs market, they spent big on discretionary items in the second quarter, fueling the strongest economic growth in close to four years  and boosting the fortunes of a raft of major retailers, many of which have been trying hard to up their game in the Amazon era.

Case in point is Walmart, which is certainly reaping the benefits of the consumer spending recovery. The Bentonville, Ark.-based mass retailer reported the best sales in a decade in the second quarter thanks to it enticing consumers to open their wallets by plowing money into renovating stores and beefing up its online arm.

Target Corp., Urban Outfitters, Inc., T.J. Maxx and Kohl’s Corp. are among other retailers that have been benefiting from Americans feeling better off and will no doubt be hoping that this trend continues into the vital Christmas period, which makes up the lion’s share of annual profits.

The National Retail Federation is clearly betting on it. The trade body recently nudged up its full-year retail spending forecasts to a minimum gain of 4.5 percent, compared to the 3.8 to 4.4 percent forecast earlier this year, citing tax reform and other positive economic inputs.

However, as history has taught us, there are always risks on the horizon when the economy is firing on all cylinders and this one is no exception, especially at a time when the U.S. is embroiled  in an escalating trade war with China.

Here, WWD takes an in-depth look at that, as well as other risks that could hamper shoppers over the coming year.

Trade war

While the trade war between China and the U.S. has been rumbling on for months, shoppers have been relatively shielded from it so far. But that is likely to change soon, unless the two countries can cooperate — and quickly.

That is because a plethora of consumer-facing items — from textiles to handbags and suitcases — are featured heavily on a list of $200 billion worth of items that the Trump administration is gearing up to hit with additional 25 percent tariffs to punish China for allegedly unfair trade practices.

It’s not yet known when these levies will come into effect, as the U.S. Trade Representative has to digest the 368 testimonies it just heard from industry representatives before finalizing the lengthy list. But there are mumblings in Washington, D.C., that October is a likely date.

While the date is up in the air, one thing is for certain: When they do come into being, it will cause a big headache for retailers and will leave many, which are heavily dependent on Chinese manufacturers, with little choice but to push up prices.

“Retailers will have no choice but to find ways to pass those costs on because the amount will be so large it will be impossible to absorb them all themselves,” said Steve Lamar, executive vice president at the American Apparel and Footwear Association. “At 25 percent, you’re definitely in a world where your options are severely limited.”

He believes that the tariffs will “absolutely” impact consumer spending, but added that the true effect won’t probably be seen until the beginning of next year as a lot of retailers have already locked in their holiday orders and have little wiggle room.

Jon Gold, vice president of supply chain and customs policy at the NRF, agrees, telling WWD that “anytime you increase prices it has a negative impact on consumer spending,” adding that a fall in consumer spending could also result in job losses at retailers and related industries.

And if this is not resolved, the situation could get worse as President Trump has pledged to go even further and target all imports if China further provokes the White House.

There is some hope, though, as it has been reported that a Chinese vice minister is planning to travel to the U.S. at the invitation of the Treasury Department to discuss trade issues this week, although it’s understood that the talks will be lower-level and just exploratory at this stage. Further talks are planned for November.

Inflation

Even before these latest Chinese tariff increases are implemented, there is evidence that the cost of essentials and a raft of discretionary items are already starting to rise, meaning American consumers could soon start feeling the pinch.

Official data released earlier this month showed that U.S. inflation rose in July at its fastest pace since 2011, offsetting modest pay increases and leading economists to caution that this will likely continue, especially if the trade war is not resolved.

Consumer price inflation, which measures what Americans pay for a raft of items, increased at an annual pace of 2.9 percent in July on the back of higher housing costs and higher vehicle costs, according to the Labor Department. Within that, core CPI inflation, which strips out volatile food and energy prices, ticked up from 2.3 percent to 2.4 percent, the largest rise since 2008.

While this isn’t a particularly worrying level for rate-setters at the Federal Reserve (their official target is 2 percent), the problem is that wages are not keeping up so the rising cost of living is starting to eat into people’s incomes.

Indeed, over the same period, wages rose at an annual pace of 2.7 percent, while the so-called hourly real wage, which takes inflation into account, was 2 cents lower in July than a year ago at $10.76.

The bottom line is that while tax cuts have made many families feel better off, the fact that earnings aren’t keeping up with inflation could mean that could all change soon.

Interest rate rises

Rising inflation will most likely mean higher interest rates. Economics 101 dictates that central banks raise rates to keep inflation in check with official targets and that is what the Fed is widely expected to do next month, fitting in with its policy of weaning Americans off seven years of near-zero rates.

“The acceleration in core inflation to 2.4 percent in July, a decade high, will be enough to convince the Fed to raise interest rates again in September,” Michael Pearce, senior U.S. economist at Capital Economics, said.

Consumers have already seen seven — albeit small — increases since 2015 and will have to brace themselves for several more over the next couple of years, with the Fed expecting rates to hover around 3.4 percent in 2020.

So far consumers have taken the increases in stride as the rises have been gradual. But that will get more difficult as rates creep upward and push borrowing costs higher, meaning maintaining credit-card balances, student loans and many mortgages will become more and more expensive.

Scott Hoyt, senior director at Moody’s Analytics, said: “The second biggest risk after the trade war that I would put on my list is rising interest rates because it makes durable goods, in particular, more expensive — anything that you have to borrow to buy is now more expensive. It will affect auto sales and other big-ticket purchases.”

Policymakers will want to tread carefully and make sure consumers can withstand rate increases so they don’t curb spending at stores and in turn derail any recovery.