TLDR
- U.S. Consumer Price Index (CPI) fell 0.1% in March, the first monthly decline since May 2020
- Annual inflation rate dropped to 2.4% from February’s 2.8%, beating economists’ expectations
- Core inflation (excluding food and energy) rose at slowest pace in four years at 2.8% annually
- Trump paused reciprocal tariffs for 90 days but increased Chinese import tariffs to 125%
- Economists warn inflation improvements may be temporary as tariffs likely to push prices higher
The U.S. economy received some welcome news on inflation as the Consumer Price Index (CPI) unexpectedly fell 0.1% in March, marking the first monthly decline in nearly five years. According to data released by the Bureau of Labor Statistics, the annual inflation rate dropped to 2.4% from February’s 2.8%, coming in below economists’ forecasts of 2.5%.
Core inflation, which excludes volatile food and energy prices, rose just 0.1% for the month and 2.8% over the past year. This represents the slowest annual pace for core inflation since March 2021 and marks the second straight monthly decline in both headline and core CPI measures.
The cooling inflation comes as President Donald Trump implements a series of trade policies that economists warn could reverse recent progress on prices. While Trump celebrated the news on Truth Social with a post stating “INFLATION IS DOWN!!!”, many analysts caution this could be temporary.
Tariff Impact Looms Large
Despite March’s positive inflation data, Trump’s recent tariff announcements have cast a shadow over future price trends. The president announced a 90-day pause on reciprocal tariffs for most countries but simultaneously increased U.S. levies on Chinese imports to 125%, up from 104%.
The 10% baseline duties that went into effect last weekend for most countries remain in place. Mexico and Canada still face separate duties related to fentanyl, while industry-specific tariffs on steel, aluminum, and autos continue unchanged.
“This could easily be the last really good CPI day for a while,” warned Claudia Sahm, former Federal Reserve Board economist and current chief economist at Century Advisors. “The tariffs that have gone into effect [will take] time to show up in the data.”
Capital Economics estimates that inflation could peak at about 4%, double the Federal Reserve’s 2% target. The minutes from the Fed’s March meeting showed policymakers were concerned about “higher inflation and slower growth” with participants noting “inflation was likely to be boosted this year by the effects of higher tariffs.”
Key Price Changes in March
Several categories contributed to March’s cooling inflation. The energy index dropped 2.4% month-over-month after rising in previous months, with gasoline prices falling 6.3%. On a yearly basis, energy prices were down 3.3%.
Used car prices declined 0.7% for the month, while airline fares plummeted 5.3%. Motor vehicle insurance costs fell 0.8%, and medical care commodities dropped 1.1%.
Housing costs showed signs of easing, with shelter rising 4% on an annual basis – the smallest increase since November 2021. On a monthly basis, shelter increased 0.2%, down from 0.3% in February.
However, not all categories saw price decreases. Food prices rose 0.4% in March after a 0.2% increase in February. Egg prices surged 5.6% for the month and have skyrocketed 60.4% over the past year, largely due to bird flu affecting supply.
Other areas with yearly increases include motor vehicle insurance (+7.5%), medical care (+2.6%), recreation (+1.9%), and education (+3.9%).
Fed Policy and Economic Outlook
The Federal Reserve is closely monitoring inflation data as it considers its next moves on interest rates. Fed Chair Jerome Powell indicated last week that the central bank is in no rush to adjust rates, stating:
“It is too soon to say what will be the appropriate path for monetary policy.”
Financial markets now expect the Fed to resume cutting interest rates in June, having paused its easing cycle in January. The Fed’s policy rate currently stands at 4.25%-4.50%.
A separate Labor Department report showed initial claims for unemployment benefits increased slightly to 223,000 for the week ended April 5, suggesting the labor market remains relatively stable despite growing concerns about tariffs.
The Trump administration’s tariff campaign has already weakened business and consumer sentiment, which could affect investment, spending, and demand for labor. Some economists believe the tariffs have raised the odds of a recession over the next 12 months.
Financial markets had mixed reactions to the inflation news. The U.S. dollar fell against other currencies, while Treasury yields declined. Gold prices extended their rise, threatening to eclipse the existing record high of $3,167 per ounce.
Bitcoin dipped slightly, moving from a session high of $82,700 to $81,500. U.S. stock futures remained negative as investors processed the complicated mix of cooling inflation against rising tariff concerns.
As the economy navigates these cross-currents, March’s inflation data provides a moment of optimism. But with tariffs set to work their way through supply chains in coming months, many economists view this as potentially the last favorable inflation report for some time.
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