TLDR:
- March CPI decreased 0.1%, first monthly decline since May 2020
- Annual inflation rate fell to 2.4%, below February’s 2.8% and economists’ 2.5% forecast
- Core inflation rose at slowest pace in four years (2.8% annually)
- Trump increased tariffs on Chinese imports to 125% while pausing other tariffs for 90 days
- Economists predict tariffs will reverse inflation progress in coming months
The latest inflation report shows a cooling trend that exceeded economists’ expectations. The Consumer Price Index (CPI) fell 0.1% in March, marking the first monthly decline since the early days of the pandemic in May 2020, according to Bureau of Labor Statistics data released Thursday.
The annual inflation rate dropped to 2.4%, down from 2.8% in February and beating forecasts of 2.5%. This represents the second consecutive month of declining inflation rates.
Core inflation, which removes volatile food and energy prices, rose just 0.1% for the month and 2.8% over the past year. This annual core inflation rate is the lowest the U.S. has seen in four years.
The positive inflation news comes amid growing economic concerns about the impact of President Trump’s tariff policies. Financial markets had been unsettled by recent trade developments, but March’s CPI report provided temporary relief.
Energy Leads Price Declines
Several categories contributed to March’s cooling inflation. Energy prices fell 2.4% for the month, reversing increases seen in January and February.
Gasoline prices dropped 6.3%, influenced by declining crude oil prices as concerns grow about global economic slowdown. The yearly energy index was down 3.3%.
Used car prices declined 0.7% in March, continuing their downward trend. Airline fares saw an even steeper drop of 5.3% month-over-month.
Medical care commodities fell 1.1%, while motor vehicle insurance costs decreased 0.8%. These declines helped offset increases in other categories.
Housing and Food Costs
Housing costs, which have been a persistent driver of inflation, showed signs of easing. The shelter index rose 4% on an annual basis—the smallest yearly increase since November 2021.
On a monthly basis, shelter costs increased 0.2%, down from 0.3% in February. The rent index rose 0.3%, while owners’ equivalent rent increased 0.4%.
Lodging away from home prices fell 3.5% for the month, suggesting cooling demand in the travel sector. However, not all consumer expenses saw price decreases.
Food prices increased 0.4% in March after rising 0.2% in February. Grocery store prices went up 0.5%, with meat, fish, and dairy products seeing solid increases.
Egg prices continue to be a pain point for consumers, rising another 5.6% for the month. Over the past year, egg prices have soared 60.4%, largely due to bird flu disrupting supply chains.
Tariff Concerns Grow
Despite the positive inflation report, economists warn that the improvements may be short-lived due to President Trump’s recent tariff announcements. The day before the CPI release, Trump announced a 90-day pause on reciprocal tariffs for most countries.
However, he simultaneously increased levies on Chinese imports to 125%, up from the previous 104%. The 10% baseline duties that went into effect last weekend for most countries remain in place.
“This could easily be the last really good CPI day for a while,” warned Claudia Sahm, former Federal Reserve 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 projects that inflation could reach approximately 4% in the coming months, double the Federal Reserve’s 2% target. This forecast considers the impact of current and planned tariffs.
Minutes from the Fed’s March meeting revealed that policymakers were nearly unanimous in their concern about “higher inflation and slower growth.” They specifically noted that “inflation was likely to be boosted this year by the effects of higher tariffs.”
Federal Reserve’s Next Steps
The Federal Reserve is carefully monitoring inflation data as it considers future interest rate decisions. Fed Chair Jerome Powell indicated last week that the central bank is taking a cautious approach.
“It is too soon to say what will be the appropriate path for monetary policy,” Powell stated, suggesting the Fed is waiting to assess the full impact of recent trade policies.
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%.
Labor market data released alongside the inflation report showed initial unemployment claims rose slightly to 223,000 for the week ended April 5. This suggests the job market remains relatively stable despite growing economic concerns.
The tariff situation has already weakened business and consumer sentiment. This could weigh on investment, spending, and hiring in the coming months.
Some economists believe the tariffs have increased the likelihood of a recession within the next year. The full impact of the trade policies will take time to appear in economic data.
Market reactions to the inflation news were mixed. The U.S. dollar fell against a basket of currencies, while Treasury yields declined.
Gold prices extended recent gains, approaching the record high of $3,167 per ounce. Bitcoin moved lower, dropping from $82,700 to around $81,500.
While March’s inflation report provides a moment of optimism, the economic outlook remains clouded by trade tensions and tariff concerns. The coming months will reveal whether this inflation improvement was a turning point or merely a temporary respite.
