Inflation dropped significantly in March, falling to an annual rate of 2.4%. That’s below the expected 2.6%, and the lowest inflation has been for the last six months.
The White House was obviously pleased. “Under President Trump, America is back — but inflation is not,” read the White House statement on the March inflation numbers
March’s 0.1% price drop compared to a 0.2% increase in February shows that it’s possible that we’ve finally turned the corner on Biden’s pandemic inflationary spiral. It’s the first time inflation has actually fallen on a monthly basis since May 2020.
The closely watched core inflation rate, excluding food and energy prices, was 2.8% annually, up 0.1% for the month.
The price of eggs rose 5.9% in February and is up 60.4% on an annual basis.
A 6.3% decline in gasoline prices helped drive a 2.4% broader decline in the energy index. That helped offset the 5.9% increase in food prices. Shelter prices, airline tickets, insurance rates, and used car prices, all significant drivers of inflation over the last several years, fell significantly in March.
“The decline in core inflation in March will definitely be welcomed by the Fed, particularly as it was evident in both core goods and services components,” Brian Coulton, chief economist at Fitch Ratings, said in a statement. “But we know firms had been sucking in huge amounts of imports in January and February in advance of tariff hikes, so the shock to consumer goods prices from tariff hikes is not reflected yet.”
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The elephant in the room is Trump’s tariffs and the question of how much, if any, they will impact inflation.
The 12-month core rate decelerated to 2.8% from 3.1%, marking its lowest level in four years. The Federal Reserve is aiming to reduce inflation to 2%.
There was no clear evidence that prior threats or implementation of tariffs affected prices last month.
Either the April or May CPI would likely be the first report to show the effects of the tariffs, economists say. Even after Trump climbed down from his tariff stance on Wednesday, U.S. duties are still the highest in decades.
Paul Ashworth, chief North American economist at Capital Economics, estimated the yearly rate of U.S. inflation could climb again to as high as 4% if all the tariffs are kept in place.
That inflationary pressures were not evident despite wall-to-wall hype about how tariffs were going to drive prices sky-high is significant. Either businesses and consumers ignored the chatter about rising prices or refused to factor them in until they actually happened.
The psychology of pricing works both ways. If businesses and consumers don’t expect prices to rise, they likely won’t. This is something that many of the doom-and-gloom pundits are ignoring.
“It’s much too soon to blow the all clear — both on tariffs or on inflation — since the tariff damage has only been postponed as of now,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “However, at least the underlying trends seem benign at this time.”
Matt points out that both the imposition of high tariffs and Trump’s sudden announcement to delay them 90 days are all part of “The Art of the Deal.” This is why the continuing downward pressure on prices is likely to offset and perhaps overcome any increase in prices as a result of tariffs.
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