March CPI Overview
Consumer prices fell 0.1% in March according to the Consumer Price Index released by the Bureau of Labor Statistics. This marks the first monthly drop since July 2022. Annual inflation increased 2.4% compared to 2.8% in February.
Inflation Components
Core inflation, excluding volatile energy and food prices, grew at 2.8% over the last year, the smallest 12-month increase since March 2021. A 6.3% decline in gas prices more than offset increases in electricity and natural gas indexes. Food prices rose 0.4% in March, with the meats, poultry, fish, and eggs index up 7.9% over the past 12 months and eggs alone jumping 60.4%. Shelter inflation dropped to 4.0% from 4.2% in February.
As consumers brace for the impact of tariffs on prices on a host of staples and discretionary goods, there's considerable uncertainty on what that near-term magnitude of the impact will be for growth and inflation, although the direction for each is clearer.
Tariff Impacts and Economic Outlook
Inflation trends toward the Federal Reserve's 2% target, but President Trump's new tariff measures could derail this progress and hinder economic growth. Economists are updating forecasts for lower growth and higher inflation through the year. Tariffs contribute to increased recession risks, with major institutions like Goldman Sachs and J.P. Morgan raising probabilities. Rising prices may prompt consumers to curb spending, trade down to cheaper alternatives, or delay purchases, souring sentiment and constraining activity.
Sentiment has soured in recent months, and there are already signs of not only a more cautious mood but more constrained spending. Prices may rise, but that doesn't mean that consumers will pay any price for any product.
Federal Reserve Response
Despite tariff concerns, the Fed continues to hold interest rates steady and is not expected to make significant changes soon, including rate cuts. The central bank awaits more clarity on the full impact of these policies before acting, as tariffs could lead to higher inflation and slower growth.
Housing and Mortgage Trends
Mortgage rates continue trending down, remaining under 7% for the twelfth consecutive week at an average of 6.62% for 30-year fixed rates in the week ending April 10, per Freddie Mac's Primary Mortgage Market Survey. Purchase applications are climbing, shaping up a more favorable spring homebuying season than last year. Shelter inflation's decline could aid interest rate decisions, though overall inflation remains above the Fed's 2% target.
As purchase applications continue to climb, the spring homebuying season is shaping up to look more favorable than last year.
Unfortunately, inflation remains painfully stubborn, well above the Fed's 2% target for lowering rates.
