Inflation showed signs of easing in March, primarily due to decreased gasoline prices. However, the imposition of tariffs could offset these gains in the coming months, alongside persistent challenges in categories like groceries, according to economists.
The consumer price index climbed 2.4% for the 12 months ending in March, a drop from the 2.8% increase observed in February, as reported by the U.S. Bureau of Labor Statistics. This suggests a notable deceleration in inflation rates.
Despite the overall decline, grocery prices remain a significant concern, and economic policies enacted by the Trump administration are seen as a major obstacle. “It would have been a really strong report,” said Mark Zandi, chief economist at Moody’s, adding that “the tariffs and trade war diminish its significance.”
Zandi also pointed out that the report does not account for the impact of recently imposed tariffs, particularly on imports from China.
The consumer price index is a key measure reflecting price changes for a range of goods and services, including everyday items such as haircuts, coffee, clothing, and entertainment tickets.
The CPI inflation rate has significantly decreased from its pandemic peak of 9.1% in June 2022. Nevertheless, it still exceeds the Federal Reserve’s desired target rate of approximately 2% for the long term.
Why tariffs raise prices
According to economists, tariffs—taxes levied on U.S. importers—inflate costs for businesses, which, in turn, are transferred to consumers. For instance, tariffs on steel are predicted to increase the prices of steel-heavy products such as automobiles, homes, and machinery.
Thomas Ryan, an economist at Capital Economics, stated that tariffs will likely be the primary driving force behind rising inflation throughout the year.
On Wednesday, President Donald Trump decided against implementing steep tariffs on several trading partners following a drop in the stock market and a rise in U.S. government bond yields, which negatively affected bond prices.
While he postponed the introduction of “reciprocal tariffs” for 90 days, a universal 10% tariff remains in effect on all imports from other countries, with Canada, China, and Mexico facing additional specific tariffs.
Imports from China, for example, carry a 125% tariff, prompting China to retaliate with an 84% tariff on U.S. exports. Trump has also introduced targeted tariffs on aluminum, steel, and automobile parts.
Wendong Zhang, a professor of applied economics and policy at Cornell University, noted that many products imported into the U.S. predominantly come from China, including smartphones, laptops, video game consoles, toys, and even antibiotics for livestock. He warned that sourcing from alternative markets would take time and incur higher costs.
Capital Economics predicts that Trump’s tariff policies will push U.S. inflation to approximately 4% by the end of 2025, nearly double the Federal Reserve’s long-term target. Vanguard Group also estimates a similar uptick in inflation, especially regarding goods prices, projecting an overall inflation rate of 4% for the year 2025 due to U.S. tariffs and the resulting global responses.
Economists express uncertainty regarding whether the inflationary effects will be temporary or more enduring.
Housing disinflation ‘set in stone’
Absent the influence of Trump’s economic policies, inflation was expected to continue its steady decline into 2025, according to Preston Caldwell, chief U.S. economist at Morningstar.
Caldwell emphasized that housing inflation plays a crucial role in this disinflationary trend.
Due to its significance in the consumer price index, shelter contributes heavily to inflation trends. Annual shelter inflation fell to 4% in March, marking the smallest yearly increase since November 2021, according to BLS data.
According to Caldwell, the trend of housing disinflation is now firmly established.
Gasoline prices tumble
Gasoline prices experienced a notable decline in March, dropping 6.3% from February to March after adjusting for seasonal variations, as reported by the BLS. Over the past year, seasonally adjusted prices have fallen by approximately 10%.
As oil prices plummeted in early April, driven by fears of a global recession dampening demand, experts suggest that gasoline prices may continue to drop if this trend persists.
Groceries are a trouble spot
Challenges persist in certain areas, particularly with food prices, which Zandi described as “the significant blemish” in the CPI report, especially concerning groceries.
BLS data reveals that grocery prices increased by 0.5% from February to March, up from no change the previous month. This rise exceeds the roughly 0.2% monthly increase that economists deem necessary to align with the Fed’s inflation target.
Particularly, egg prices spiked nearly 6% during the month and have seen a staggering 60% increase over the past year, largely due to a U.S. outbreak of bird flu that has decimated egg-laying chickens and constrained supply.
Prices for instant coffee have risen sharply by approximately 13%, driven by climate change-induced droughts that have disrupted major coffee-producing countries like Brazil, limiting the availability of coffee beans.
However, Zandi indicated that the overall rise in grocery prices cannot be attributed to a single factor or product. He expressed concern that food inflation continues to escalate despite a decline in diesel prices, which typically helps lower transportation costs and should, in theory, reduce prices at grocery stores.
“This inflation report highlights both positive aspects and ongoing challenges in food prices and energy components like electricity and natural gas,” stated Greg McBride, chief financial analyst at Bankrate. “Yet, these observations largely reflect past conditions. As for inflation and the broader economy, uncertainty looms regarding future developments.”
