Inflation slowed materially ahead of tariffs

April 10, 2025

The consumer price index (CPI) fell by 0.1% in March from February, held down by a 6.1% drop in energy prices. The CPI increased 2.4% from a year ago, matching the reading from September 2024. That is well below the 2.8% annual increase in February. Notably, this pace is nearly consistent with the Federal Reserve’s 2% target for the personal consumption expenditures (PCE) index measure of inflation that it targets.

The core CPI, which excludes food and energy, rose a tame 0.1% and the three-month annualized change slowed to 3.0% from 3.6% a month earlier. That translates to a 2.8% increase from a year ago, the lowest level since March 2021, when inflation was rising sharply. Overall, this is a welcome report suggesting that inflation continued to moderate ahead of the implementation of tariff increases.

Prices at the gas pump fell sharply (6.3%), while food prices accelerated, rising 0.4%, after a 0.2% increase in February. The outlier is the cost of proteins; eggs jumped 5.9%. They are now up 60% from a year ago on the heels of a bird flu outbreak. Beef and coffee prices have experienced double-digit increases over the past year. Food at home prices rose 2.4% over the past year, while food away from home rose 3.8% on the same basis.

Shelter costs continued their uneven deceleration as lodging away from home plunged 3.5% on the month, the largest decline since January 2022. Hotel room rates have been falling after surging in response to the thousands displaced by fires in California in February. A later than usual Easter, which delayed some travel plans and anecdotal reports suggest cancelations of reservations by Canadians and others may also be in play.

Still, rent of primary residences rose 0.3%, while owners’ equivalent rent rose 0.4%, suggesting only gradual slowing in inflation in these large categories. We should see more cooling in the rent component as we move through 2025. Apartment rents in many markets have rolled over, while house-price appreciation has slowed. It takes time for the changes to show up in leases and inflation measures; that should be an area that helps hold down inflation in months to come.

The super core services CPI, which strips out shelter costs, fell 0.2% in March, reversing the 0.2% rise in February, pulled lower by the drop in hotel room rates. The super core rose 2.9% from a year ago, down from 3.8% in February. An outsized 5.3% drop in airfares helped but will not flow through directly into the PCE measures of inflation to be released later this month. We will get more insight on that measure of inflation when the PPI is released tomorrow.

Momentum measures for the CPI were encouraging. The CPI rose 2.6% on a three-month annualized basis, a slowdown from the 4.3% pace of February.  The six-month annualized pace fell to 3.0% from 3.6% a month earlier.

For the core CPI, the three- and six-month annualized rates came in at 3.0% and 3.0%, down six tenths of a point from a month earlier.  This sharp deceleration is welcome news but was measured prior to tariffs taking effect.

Momentum in the super core index slowed. The three- and six-month annualized changes fell to 3.0% and 3.1% respectively. Both have been on the decline but remain elevated from the perspective of the Federal Reserve.

Big-ticket durable goods prices were flat, but are down 1.0% from a year earlier.  New vehicle and used vehicle prices will be among the categories most boosted by tariffs due to their steel and aluminum content, helped by other appliances and household furnishings. We saw beverage prices increase with the costs of cans the last time steel and aluminum tariffs were hiked.