U.S. consumer prices unexpectedly fell in March amid cheaper gasoline and used motor vehicles, but the benign inflation reading is unlikely to be sustained after President Donald Trump doubled down on tariffs on imported Chinese goods.
The first monthly decline in prices in nearly five years, reported by the Labor Department on Thursday, also suggested softening demand amid heightened recession fears due to tariffs, and led financial markets to anticipate the Federal Reserve could cut interest rates by 100 basis points this year.
Airline tickets cost less as did hotel and motel rooms, pointing to declining discretionary spending amid a sharp deterioration in business and consumer sentiment.
There have been reports of Canadians boycotting travel to the U.S. Trump has often mused about annexing Canada. Delta Air Lines (DAL.N) this week said travel demand had "largely stalled." Some economists believe the expected tariff-driven inflation surge could be blunted by weakening demand.
The Consumer Price Index data for March was largely dismissed as dated because it likely captured only a fraction of the first wave of Trump's barrage of import duties, including a 20% tariff on Chinese goods and levies on steel and aluminum.
"The good news of an inflation soft print in March needs to be taken with a grain of salt because the trade war against China from where most consumer goods that Americans buy come from has gone into hyper drive," said Christopher Rupkey, chief economist at FWDBONDS.
The CPI dipped 0.1% last month, the first drop since May 2020, after gaining 0.2% in February, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the CPI would edge up 0.1%.
Gasoline prices fell 6.3%. Crude oil prices have declined on growing concerns the global economy is stagnating. Food prices rose 0.4% after climbing 0.2% in February. Grocery store prices increased 0.5%, boosted by a 5.9% rise in the cost of eggs.
There were also solid increases in the prices of meat, fish and dairy products. But fruit and vegetable prices decreased as did those for cereals and bakery products.
In the 12 months through March, the CPI advanced 2.4% after rising 2.8% in February.
Trump on Wednesday said he had suspended targeted tariffs on trade partners for 90 days, less than 24 hours after steep new duties kicked in and plunged financial markets into turmoil.
But Trump jacked up the duties on Chinese merchandise to 125% from 104% after Beijing hit back with an 84% tariff on U.S. goods. A 10% blanket duty on almost all U.S. imports remains in place as does a 25% tariff on motor vehicles.
Duties are looming on pharmaceutical products.
Trump's tariffs, which he sees as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining U.S. industrial base, have raised the odds of a recession over the next 12 months.
Financial markets expect the Fed to resume cutting interest rates in June. The U.S. central bank paused its easing cycle in January. The release on Wednesday of the minutes of the U.S. central bank's March 18-19 meeting showed policymakers were nearly unanimous that the economy faced risks of simultaneously higher inflation and slower growth.
The Fed's policy rate is currently in the 4.25%-4.50% range.
HIGHER INFLATION ANTICIPATED
"Even with the tariff temperature turned down for now, uncertainty hasn't dissolved," said Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management. "Consumer and business sentiment indicators reflect concerns around the potential growth and inflation impacts of trade policy in the year ahead. The Fed understands this."
Excluding the volatile food and energy components, the CPI gained 0.1% in March. That was the smallest rise in the so-called core CPI inflation since June 2024 and followed a 0.2% advance in February. Core CPI inflation was restrained by a 0.7% decline in the price of used cars and trucks, which economists expected would be temporary given the auto duties.
"Owners are likely to hold onto their current vehicle for longer, restricting supply of second-hand vehicles," said James Knightley, chief international economist at ING. "Higher new vehicle prices will also inevitably mean higher repair and insurance costs that will also show up in CPI."
Airline fares dropped 5.3% and the cost of hotel and motel rooms declined 3.5%.
"There have been a number of reports that Canadians are boycotting travel to the U.S., and other foreigners may be doing the same, while caution may also be restraining travel for domestic businesses and households," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.
Motor vehicle insurance and recreation cost less. New motor vehicle prices rose slightly and the cost of household furnishings was unchanged.
But owners' equivalent rent rose 0.4% and the cost of personal care surged 1.0%. There were also increases in the price of education and healthcare, mostly hospital services. The cost of prescription medication dropped 2.0%.
Core CPI inflation increased 2.8% on a year-on-year basis in March, the smallest advance since March 2021, after rising 3.1% in February. Based on the CPI data, economists estimated the core Personal Consumption Expenditures price index rose 0.1% in March after jumping 0.4% in February.
That would slow the annual increase in core inflation to 2.6% from 2.8% in February. The Fed tracks the PCE price measures for its 2% inflation target. Capital Economics estimated that inflation will peak at about 4%.
Higher goods prices were not expected to spill over to services as a softening labor market puts a lid on wage gains.
A separate report from the Labor Department showed the labor market held steady in early April, though economists are bracing for layoffs because of the import duties.
Goods inflation was, however, seen partially offsetting the anticipated services disinflation.
"While we do expect stronger goods prices by the summer in components like apparel and furniture, March CPI is emblematic of a key conflict for inflation data this year: softer demand will weigh on prices broadly but especially in services, partly offsetting the effect of higher costs," said Veronica Clark, an economist at Citigroup.
