Inflation cooled unexpectedly sharply in March. This is a welcome development given the uncertainty surrounding President Trump's global tariffs and is widely expected to blow away price pressure.
The consumer price index rose 2.4% from last month, a much slower pace than the 2.8% increase in February and a lower annual rate since September. Prices fell 0.1% throughout the month.
Gauge tracking, which underlies “core” inflation, removing volatile foods and energy items, slid to 2.8% in March after an increase of 0.1% per month.
The report was released by the Bureau of Labor Statistics on Thursday, covering the period before the majority of Trump's tariffs were introduced, bringing a significant decline in economists' expectations. Recently, the president's plans have changed dramatically, culminating in the administration on Wednesday, announcing a 90-day suspension that punishes taxation, which was introduced on April 2.
Trump's decision to suspend comes as global financial markets began to wobble and flush warning signs about investors' desire for US assets. While goods coming to the country from most countries currently face 10% tariffs, Chinese imports face 125% charges following Beijing's decision to retaliate against US products.
Trump's pivot has significantly eased concerns about the extent of economic damage caused by his administration's trade policies. But economists warn that tariffs on the spot will still be expensive and prove to be slower and lead to higher inflation.
A major issue with the Federal Reserve is how members balance these risks when discussing what to do with interest rates. Even before Trump's tariffs, inflation has proven stubbornly sticky, and has progressed towards a stalling central bank's 2% target in recent months. That's why the Fed has been hesitant to continue cutting interest rates after a string of cuts last year. This is a caution amplified by the implementation of higher tariffs.
With inflation ready to temporarily accelerate again, the Fed has made it clear that bars are high for further interest rate cuts, even if it becomes temporary. This means that for the Fed to take all action, concrete evidence that the economy is weakening in a critical way.
Perhaps the biggest concern for central banks is the situation where expectations for future inflation begin to change in ways that suggest Americans are worried that price pressures will remain constantly high. In a recent speech, Federal Reserve Chairman Jerome H. Powell said in a recent speech it was the agency's “duty” to curb inflation expectations and ensure that one-time price levels rise does not become an ongoing inflation issue.
So far, only a handful of survey-based measures have shifted in a prominent way, including those run by the University of Michigan. Market-based measures have been much less. Still, Ricardo Leis, an economist at the London School of Economics, said the “size and visibility” of the inflation shock is just as much a concern as the “mixed signal” from expected data.
“The Fed has inflation targets to meet, and the impact of tariffs on inflation is very direct and fast,” he said. “We should talk about it being tough.”
