March CPI report: Risks delayed, not removed

Market response

April 10, 2025 | 3 min read

Christian Floro, CFA, CMT

Market Strategist

Seema Shah

Chief Global Strategist

The March CPI report was lower than expected, with headline CPI showing monthly deflation, the lowest monthly change since May 2020, bringing the annual numbers down to 2.4% and 2.8%, respectively. Weighing on prices has been a notable decline in gasoline prices and ongoing softening in demand for travel, both likely triggered by trade policy related uncertainty. Nevertheless, with the full impact of the upward rise in trade barriers yet to influence prices, the Fed ultimately has no room for complacency, so rate cuts are unlikely to be aggressive.

Report details

Monthly headline inflation declined 0.1% in March, lower than expected and the smallest monthly variation since May 2020, bringing the annual rate to 2.4%—from 2.8% prior. Core inflation, which strips out food and energy, also came in lower than expected, increasing 0.1% in March as the annual rate decelerated to 2.8%—from 3.1% prior. Although headline prices seeing deflation for the first time since the pandemic and core price increases continuing to moderate is encouraging, the release is now outdated given the fluid policy environment on trade.
Food prices increased 0.4% in March, with prices for food at home rising 0.5% as four of the six major grocery store food groups increased. The closely watched eggs category saw a more moderate 5.9% increase in the month (from 10.4% prior), with price increases likely to continue to soften as wholesale prices have collapsed. Energy prices decreased 2.4% in March, weighing on overall inflation and helped by a large 6.3% drop in gasoline prices.
The modest increase in core inflation has remained predominantly a function of services prices, which increased 0.1%. Shelter remained the largest contributor to this category, with owners' equivalent rent rising 0.4%, the largest increase since October 2024. Meanwhile, weighing on the overall increase in services has been a continued softening in demand for travel, likely driven by uncertainty triggered by trade policy. Lodging away from home prices dropped 3.5% while airline fares fell 5.3%, both the largest since the fall of 2021.
Core goods prices returned to deflation in the month, decreasing 0.1%, driven by a 1.1% decline in medical care commodities and used vehicle prices. This more than offset the 0.4% increase in apparel, which is predominantly imported from China, which may be showing early signs of tariff pass through, albeit the overall effect remains muted at this stage. Looking ahead, the impact of rising tariffs will likely continue to pressure core goods prices higher in the months ahead.
The Fed's preferred supercore inflation measure, which excludes shelter from core services and is primarily driven by wage costs, declined by 0.2%, leading the annual rate to decline from 3.8% to 2.9%, the lowest since March 2021.

Policy outlook

Today’s inflation report, which was softer than expected, should provide some reassurance to markets, which were rocked in the past week with trade policy-related volatility. Fed speakers have been reiterating their inflation caution in recent days, but if inflation pressures prove to be more sanguine, then they will be more willing to provide the necessary support to the economy.

The reprieve is likely to be temporary, however, as tariffs will trigger a surge in inflation. The increase in U.S. tariffs on China’s imports will deliver meaningful upward pressure to costs unless supply chains are diverted to other economies, so inflation risks remain elevated, even after yesterday’s 90-day reprieve to the rest of the world. The Fed ultimately has no room for complacency, so rate cuts may be fairly constrained. We anticipate three to four cuts this year, with a severe labor market slowdown or simmering systemic risks the only factors to drive a more aggressive response.

Macro views

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