Consumer Price Index March 2025

Cooler inflation before the tariff heat 
 

• The March Consumer Price Index (CPI) report offered a heartening albeit backward-looking picture of inflation dynamics, before steep increases in tariffs were enacted. Headline inflation slipped to its lowest level since February 2021 – within striking distance of the Fed’s 2% target – while core inflation broke below the 3% mark for the first time since March 2021. Looking ahead though, higher tariffs will lead to a renewed inflation impulse in coming quarters, with core CPI inflation likely to end 2025 in the 3.5%-4% range. 
  
  
• Headline CPI unexpectedly fell by 0.1% month over month (m/m) in March following a modest 0.2% increase in February. Energy prices plunged 2.4% as gasoline prices plummeted by 6.3% and more than offset higher energy prices. Food prices regained some momentum and registered a moderate 0.4% gain as grocery prices rebounded 0.5% amid lingering egg and dairy price pressures. 
  
  
• Core prices (excluding food and energy) rose a smaller-than-expected 0.1% m/m in March, the smallest increase in nine months and a second consecutive downside surprise. Core goods prices fell 0.1% after rising for six straight months, while core services prices (excluding energy) only gained a mild 0.1% in a sign that weaker discretionary spending may be weighing on prices.
  
  
• On an annual basis, headline CPI inflation fell 0.4 percentage points (ppt) to 2.4% year over year (y/y) – matching the September 2024 pace, which was the slowest since February 2021 – while core CPI inflation cooled 0.3ppt to 2.8% y/y – the slowest pace since March 2021. 
  
  
• Short-term inflation dynamics notably improved in March. Headline CPI inflation cooled 1.7ppt to 2.6% on a three-month annualized basis and fell 0.6ppt to 3% on a six-month annualized basis. Core CPI inflation eased 0.6ppt to 3% on both a three-month and six-month annualized basis. 
  
  
• While the March CPI report brought some encouraging news, the relief is likely to be short-lived as upcoming inflation reports will likely reflect some pass-through from recent steep tariff increases. Our modeling shows that if the universal 10% tariff on all trading partners and 125% tariff on China are maintained, US consumer price inflation could be 0.8ppt higher in 2025, with the inflationary impulse concentrated in the second quarter of the year. 
  
  
• For the Fed, tame inflation data and resilient labor market conditions support the case for holding rates steady through midyear. With little clarity on where the administration’s trade strategy will ultimately land, expecting a swift pivot toward aggressive easing would be premature. We believe the Fed will eventually decide to ease policy, but a late response to growing economic weakness will exacerbate the slowdown and favor three rate cuts in the second half of the year as the economy slows. 

Energy prices fell 2.4% last month as a 6.3% plunge in the price of gasoline and a 4.2% decline in fuel oil prices more than offset higher utility gas service prices (+3.6%) and electricity prices (+0.9%).

Food prices rebounded 0.4% following a mild 0.2% gain in February, with grocery prices up 0.5% after being unchanged through February. Egg prices were again a key contributor to higher food prices, up 5.9% following surges of 10.4% and 15.2% in February and January, respectively. Overall, egg prices are up 60% from a year ago. Higher prices in other food categories including beef and dairy also contributed to higher grocery prices. Restaurant prices picked up by 0.4% for a second consecutive month. Grocery price inflation is on a moderate uptrend, up 2.4% y/y from a low of 0.9% y/y in August 2024, while restaurant price inflation ticked up to 3.8% y/y after reaching a trough of 3.4% y/y in January 2025.

Core goods prices fell 0.1% m/m in March, with used car prices down 0.7%, the first decline in prices in seven months. New car prices, meanwhile, rose slightly on the month while apparel prices increased a moderate 0.4%. Overall, core goods prices are still falling (as they have been for more than a year), but the deflation momentum has eased to -0.1% y/y over the past three months.

Core services prices rose a mild 0.1% in March amid easing shelter costs. Rent cost rose 0.3% m/m while owners’ equivalent rent rose 0.4% m/m. Hotel prices plunged 3.5% last month, their largest decline since January 2022. Overall, shelter cost inflation eased 0.2ppt to 4% y/y in March, its lowest since November 2021, with rent inflation trending lower to 4% y/y and owners’ equivalent rent inflation remaining steady at 4.4% y/y.

Transportation services prices fell 1.4%, driven lower by a 5.3% plunge in airfare prices and some moderation in auto insurance prices, which fell 0.8% over the month. Meanwhile, medical care service prices rose 0.5% following a modest 0.3% increase in February. On an annual basis, medical care services inflation maintained a 3% y/y pace while airfare inflation eased to -5.2% y/y and auto insurance cost inflation fell to 7.5% y/y, down from a peak of 23% y/y in April 2024.