Inflation cooled significantly in March ahead of tariff-fueled price jumps

Inflation cooled significantly in March amid a drop in energy and transportation prices, giving consumers a bit of a break before a wave of new tariffs began to kick in this month, potentially fueling higher prices and slower growth.

A key gauge of inflation - the consumer price index - showed Thursday that prices rose by 2.4 percent in March from a year earlier. That was much cooler than a 2.8 percent annual gain reported for February and a welcome sign of progress in combating high inflation, beating economists’ expectations.

Stripping out volatile food and energy categories, “core” inflation rose 2.8 percent for the year ending in March. That also beat expectations and was the smallest 12-month “core” increase in four years.

On a monthly basis, overall prices declined for the first time in about five years.

The better-than-expected March inflation report could give President Donald Trump more room to argue that the United States can afford to get tougher on trade without fueling another painful bout of inflation. White House press secretary Karoline Leavitt praised the report as “great news for American families and businesses.”

“Inflation is down, jobs are up, and the Golden Age of America is underway,” she wrote on X.

Thursday’s report demonstrates the type of progress the Federal Reserve has been hoping for as it seeks to bring inflation down to its 2 percent target. While inflation is much lower than the high levels of 2022, it remains elevated, and officials said they expect a bumpy path to getting it under control.

“In a vacuum, this is the kind of inflation data the Fed wants to see,” said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. She said there were cool-downs in some of the report’s “peskiest categories,” such as housing and transportation services.

Fed Chair Jerome H. Powell has repeatedly said the central bank doesn’t overreact to one or two inflation readings, and the Fed is unlikely to do so after Thursday’s report. That’s because economists expect progress on inflation to be short-lived as Trump moves forward with his aggressive trade war.

On Wednesday, Trump paused many of the most onerous import taxes on individual countries for 90 days, while raising tariffs for China. Still, the administration has maintained 10 percent across-the-board tariffs on all imports from most countries that it announced about a week ago, and continued tariffs on imports of steel, aluminum and autos. Those could weigh on consumer prices going forward.

The administration is also considering sector-specific tariffs on industries such as pharmaceutical and lumber imports.

“The boost to inflation from tariffs is coming,” said Ryan Sweet, chief U.S. economist at Oxford Economics.

Joe Brusuelas, the chief economist at RSM, said March’s report was primarily a story of falling energy and transportation costs offsetting rising food and rent costs. “It will provide cold comfort to the Fed,” he said, adding Fed officials will look past the report as they await a springtime surge in inflation.

On a monthly basis, prices declined by 0.1 percent amid a steep drop in prices for gasoline. Prices for food rose 0.4 percent. Egg prices, which have surged 60.4 percent since March 2024, grew by 5.9 percent for the month. Airfares fell 5.3 percent.

Trump’s approach to announcing broad and abrupt new tariffs has fueled uncertainty over the economic outlook, Fed officials say, and Wall Street economists and executives have increased their expectations for a recession this year. Before Wednesday’s moves to delay country-specific tariffs, JPMorgan Chase chief executive Jamie Dimon said on Fox Business that a recession is now “a likely outcome.”

Fed officials agreed last month to hold interest rates steady for their second consecutive meeting as they weighed the economic uncertainty of Trump’s trade and other policies. They highlighted the risks of tariffs weighing heavily on the economy by potentially fueling inflation, according to minutes of the meeting released Wednesday.

The Fed has done a good job keeping long-term inflation expectations under control, Kansas City Fed President Jeffrey Schmid said Thursday, but he still urged caution moving forward.

“Now, with renewed price pressures likely, I am not willing to take any chances when it comes to maintaining the Fed’s credibility on inflation,” he said in a speech.

Tariffs have spurred significant stock market volatility for about a week and even fueled a sell-off in the Treasury bond market earlier this week - a big red flag for the ability of businesses and consumers to borrow. The bonds are typically seen as a safe haven when markets are unsettled, and 10-year Treasury yields rose sharply to about 4.5 percent before retreating. Yields move inversely to prices, meaning investors have been quickly selling U.S. bonds.

Trump inherited a solid economy and labor market, but recent data and corporate announcements have presented a gloomy picture going forward. Walmart on Wednesday cited tariff risks as a reason for backing away from its previous target for first-quarter profit growth. Delta Air Lines pulled its earnings forecast for the year because of “broad economic uncertainty around global trade.”

The situation is a difficult one for the Fed, which has a mandate for stable prices and full employment. Tariffs could lead to higher inflation, which would normally lead to higher rates. But a trade war could also hurt growth and cause a deterioration in the labor market, which typically leads to lower rates. The Fed might have to choose which threat - inflation or job losses - is more pressing, economists say.

Powell has emphasized that inflation remains a source of deep concern. The Fed has an obligation to “keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” he said in a speech last Friday.