United States
Headline prices fell 0.1% and core consumer prices rose 0.1% in March. This took CPI from 2.8% to 2.4%. Encouragingly, it also took core CPI from 3.1% to 2.8%, significantly lower than the market expected and the lowest level since March 2021.
Little early sign of tariffs feeding through to prices just yet
Energy was a notable drag on inflation in March, falling 2.4%, driven by a 6.3% fall in gasoline prices, which more than offset a 3.6% increase in natural gas prices. Core goods were down 0.1%, with little sign yet of tariffs feeding through.
Food prices rose 0.4%. However, inflation in eggs (plagued by shortages related to avian-flu) eased from 10.4% month-on-month February to 5.9% in March.
Figure 1: Inflation eased across most categories1
We expect that the Fed will be encouraged by significant progress in “stickier” core services categories.
Shelter, the largest CPI category, continued to show gradual improvement in the stubborn rental component. Notably, the “lodging away from home” component (which includes hotels, motels and student accommodation) fell 3.5% in March. CPI excluding shelter was 1.5% year-over-year, significantly below the Fed’s target.
The “supercore” services component (which excludes the rental components of shelter) was 2.9% year-over-year (Figure 2), its lowest level since March 2021. This was largely driven by a 5.3% fall in airline fares in March.
Figure 2: “Supercore” and transportation services reach their slowest levels since March 20212
Tariffs imply near-term inflation, but slower growth could be disinflationary
The fall in energy inflation could be a prelude of more to come. Following President Trump’s, “Liberation Day” tariff announcement, global oil prices fell to around their lowest prices since April 2021 (Figure 3), on concerns around global demand. This highlights the potentially disinflationary side of tariffs.
Figure 3: Falling oil prices could highlight the disinflationary side of tariffs3
Nonetheless, we see the potential for tariffs to start reflecting higher prices in the CPI over the next few months. While the administration’s announcement of a 90-day delay to most tariffs above 10% may moderate the impact, the threat of escalation remains.
It may be a compelling time to allocate to fixed income
We believe today’s print is likely to help the Federal Reserve keep a watching brief on the inflation and growth impacts of tariffs, while potentially helping keep it on track to continue its cutting cycle later this year.
As political uncertainty continues, we believe that the recent sell-off may offer compelling opportunities to lock in income from fixed income and credit markets.
