a bittersweet inflation reading

Markets breathed a small sigh of relief last week as the latest (March) CPI release came in below consensus estimates, showing that inflation pressures eased substantially last month. Core CPI, which excludes the more volatile components of food and energy, measured 2.8% year-over-year, down from 3.1% in February, and marking its lowest level since March 2021. 

It’s important to note these numbers only partially capture the current suite of implemented tariffs. Last month saw the United States introduce a 20% baseline tariff on China and 25% on certain goods from Canada and Mexico, but it was not until April that the full tariff ensemble against a wider range of countries was unveiled. Although most nations have now been granted temporary reprieves (to 10% for 90 days), this is not so for China, which is currently being tariffed as high as 145% on its exports to the US. The impact from these tariffs will only be fully realized in inflation data in the coming months.

Moreover, an examination of the two core components of inflation reveals the risks ahead. After being the largest contributor during the 2021–2023 peak, core goods inflation has now largely subsided and has even become disinflation in recent months. But in the near-term, tariffs are expected to hit this group first, as core goods are directly affected by higher import costs that are quickly passed on to consumers (based on how elastic demand is for a given product). Meanwhile, core services inflation, which includes costs such as rent, health care, and transportation, is steadily easing but has become the primary driver of today’s price increases. If tariffs remain in place over the long-term, added import costs will feed into service providers’ input expenses, forcing them to raise their rates and contributing to inflation in service‑sector prices as well.

After years of inflation being the economy’s most persistent problem, it’s a strange reversal to see it now offering the most encouraging news. For much of the post-COVID period, inflation reports were the low point amid otherwise strong data on jobs, consumer spending, and equity markets. But in recent months, that dynamic has flipped: inflation is easing in a meaningful way, while other indicators have started to falter.

The progress is welcome, but also bittersweet. Without the uncertainty created by ongoing trade disputes, last week’s numbers might have been seen as a clear step towards inflation normalization. Instead, the report will likely mark the lowest reading for some time—less a turning point than a reminder of what could have been.