U.S. CPI Review

Preview: what’s the outlook for inflation and Fed policy?

At 2:30 PM today, we’ll get the U.S. Consumer Price Index (CPI) data for March. Forecasts suggest that price momentum slowed last month in line with weakening demand and consumer confidence. However, early signs of pricing pressure could emerge in categories such as Chinese imports and automobiles. Here is the market consensus for March CPI:

• Core CPI (YoY): Forecast 3.0%; Previous 3.1%
• Core CPI (MoM): Forecast 0.3%; Previous 0.2%
• Headline CPI (YoY): Forecast 2.6%; Previous 2.8%
• Headline CPI (MoM): Forecast 0.1%; Previous 0.2%

What Might CPI Reveal?

In March, we are likely to see the continuation of trends in the most volatile price categories. The early-year spike in food prices (driven mainly by eggs and meat) has subsided, and energy prices are expected to drag the headline figure lower.

That said, pricing pressure could surface in sectors heavily reliant on Chinese imports—such as furnishings and clothing. While the 20% tariffs imposed on China over the past month will likely be partially absorbed by thinner margins, some of the added costs may already have been passed on to consumers.

The situation in the services sector remains crucial, as it has been the key driver of both CPI and PCE readings in recent months. While airfare and the notorious rent inflation may stabilize, upward pressure in insurance and healthcare services could more than offset declines in other service categories.

Source: XTB Research, based on Macrobond data.

Tariffs and Inflation — Fed’s View

The Fed faces a complex challenge. Global trade disruptions are at record levels, and the true impact of trade restrictions is still difficult to quantify. Volatility remains elevated, as shown by Trump’s surprise announcement yesterday of a 90-day pause on heightened tariffs for most trade partners.

Some analysts suggest that today’s CPI report could be the last to show a disinflationary trend, with prices expected to rise again starting in April.

During his most recent speech, Fed Chair Jerome Powell emphasized a cautious stance regarding the impact of tariffs on CPI and the broader economy. Powell acknowledged that tariffs are higher than previously expected and represent a real risk to price stability. At the same time, trade barriers could dampen economic growth, complicating the Fed’s policy path. He concluded by saying the Fed would not rush into rate cuts and should remain a source of calm, rational analysis, and stability.

Other FOMC members have also recently shared their views:

• John Williams (New York Fed President) expressed caution regarding any quick monetary policy changes in response to tariffs, warning that they could disrupt the ongoing disinflation process and temporarily push CPI higher.
   
• Thomas Barkin (Richmond Fed President) echoed these concerns, stating that tariffs may complicate the Fed’s inflation-control efforts and add pressure on consumer prices.
   

In the long term, the outlook clearly points toward rising price pressures. However, March’s inflation report is unlikely to show a significant tariff-related impact just yet. That influence is expected to become more visible in April—if the current 10% tariff rate remains in place.

What about the rates?

Expectations for rate cuts have dropped significantly following Trump’s decision to suspend reciprocal tariffs for 90 days. At the start of the week, markets priced in a 60% chance of a May cut and a 100% probability for June. Now, those odds have shifted to just 20% for May and 60% for June—an 80% combined probability.

For now, today’s CPI report is not expected to materially change the Fed’s course. Markets still anticipate three rate cuts by the end of the year.

Source: Bloomberg Finance LP

US500 (H1)

Under more typical conditions, today’s CPI report would likely be the week’s headline event. However, the ongoing escalation in the U.S.–China trade war has pushed inflation data into the background. As a result, market volatility will likely remain contained, with index movements primarily driven by fresh commentary from the White House.

March’s CPI report also feels somewhat outdated, reflecting price dynamics under an entirely different trade regime. Currently, investors are awaiting the effects of the new 10% blanket tariffs and the unprecedented spike in Chinese import duties—from 54% to 125% in just one week. Today’s report may offer early clues of this impact, which is where the market’s attention will likely be focused.

Source: xStation 5

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