Inflation Eased in March but Tariffs Raise Risk of Higher Prices-OxBig News Network

Inflation cooled unexpectedly sharply in March, a welcome development given the uncertainties surrounding President Trump’s global tariffs that are widely expected to stoke price pressures while also denting growth.

The Consumer Price Index climbed 2.4 percent last month from a year earlier, a far slower pace than February’s 2.8 percent increase and the lowest annual rate since September. Over the course of the month, prices fell 0.1 percent.

A gauge tracking underlying inflation, which strips out volatile food and energy items, slipped to 2.8 percent in March, following a 0.1 percent monthly increase. Overall that is the slowest annual pace for “core” inflation since 2021.

The report, which was released by the Bureau of Labor Statistics on Thursday and significantly undershot economists’ expectations, covers a period before the bulk of Mr. Trump’s tariffs were put in place. In recent days, the president’s plans have changed drastically, culminating in the administration on Wednesday announcing a 90-day pause on punishing levies that were put in place on April 2.

Mr. Trump’s decision to pause came as global financial markets wobbled and started to flash warning signs about investors’ appetite for U.S. assets. Goods coming into the country from most other countries will now face a 10 percent tariff, while Chinese imports will have a 125 percent charge, after Beijing’s decision to retaliate against U.S. products.

Mr. Trump’s pivot significantly eased worries about the extent of the economic damage stemming from his administration’s trade policies. But economists warn that the tariffs in place will still prove costly, leading to not only slower growth but also higher inflation.

Consumers are at risk of bearing the brunt of the costs from tariffs, which are a tax on imports. Businesses are widely expected to try to pass along their higher expenses in the from of price increases or risk their profit margins getting squeezed significantly.

In an interview with CNBC on Thursday, Andy Jassy, Amazon’s chief executive, said he expected most of the third-party sellers on the giant e-commerce platform to do so. “I understand why, I mean, depending on which country you’re in, you don’t have 50 percent extra margin that you can play with,” he said. “I think they’ll try and pass the cost on.”

Economists worry that consumers will end up rejecting these price rises and instead significantly curtail their spending. That could weigh further on growth and even risk the economy tipping into a recession if businesses eventually are forced to fire workers as demand falls.

March’s softer data stemmed from a sharp drop in energy prices as well as a decline in transportation-related categories like airfares, auto insurance and used cars. Grocery prices rose 0.5 percent for the month, and for the year they are up 2.4 percent compared with the same time last year. A nearly 6 percent monthly rise in egg prices was the biggest contributor to that increase.

Goods prices dropped 0.4 percent in March, while services inflation once energy prices were stripped out rose only 0.1 percent.

The big question for the Federal Reserve is how to balance the risks that inflation could rise again as growth slows and ultimately what that means for interest rates. Even before Mr. Trump’s tariffs, inflation was proving stubbornly sticky, with progress toward the central bank’s 2 percent goal stalling in recent months. That had made the Fed more hesitant to continue cutting interest rates after a series of reductions last year — a caution that has been amplified with the implementation of higher tariffs.

With inflation poised to re-accelerate again, even if it ends up being temporary, the Fed has made clear that the bar for further rate cuts is high. That means it will take tangible evidence that the economy is weakening in a material way for the Fed to take any action.

Perhaps the biggest concern for the central bank is a situation in which expectations about future inflation start to shift in a way that suggests Americans are becoming worried about price pressures staying persistently high. Jerome H. Powell, the Fed chair, said in a recent speech that it was the institution’s “obligation” to keep inflation expectations in check and to “make certain that a one-time increase in the price level does not become an ongoing inflation problem.”

So far, only a handful of survey-based measures have shifted in a notable way, including one run by the University of Michigan. Market-based measures have budged far less. Still, Ricardo Reis, an economist at the London School of Economics, said the “size and visibility” of the inflation shock was a concern, as were the “mixed signals” coming from the expectations data.

“The Fed has an inflation target to meet, and the effect on inflation of the tariffs is quite direct and likely quick,” he said. “It should talk tough.”