Tariff Tempest Threatens Inflation Gains | Image Source: www.reuters.com
WASHINGTON, April 10, 2025 – At a rare time of economic calm, the U.S. Consumer Price Index (CPI) fell 0.1 per cent in March – the first monthly decline in nearly five years – suggesting that inflationary pressures could decrease, at least temporarily. But for many economists and market guards, this reprimand is less like relief and rather a strange silence before a storm. And this storm is the intensification of President Donald Trump’s trade war, which now includes global tariffs of up to 125% on Chinese products and a 10% bond on most other imports.
According to the U.S. Office of Labour Statistics, the annual increase of the ITC was 2.4 per cent, compared with 2.8 per cent in February. The Central ITC, which excludes volatility in food and energy prices, increased by only 0.1 per cent for the month and by 2.8 per cent per year. But while the number of titles offers a moment of optimism, the underlying data paints a more complex picture. Gas prices fell by 6.3%, used cars and trucks became cheaper, and discretionary spending on items such as airfares and soft hotel stays. However, food prices have risen sharply, with egg prices rising by almost 6% per month due to the persistent effects of avian influenza, as noted by the BLS.
According to the analysis of Reuters and CNN, this cooling of inflation may already be obsolete. Much of the March data probably lost most of Trump’s new tariff cycle, which only came into effect in early April. According to EY-Parthenon economists, the ITC could still increase by 0.8 percentage points this year due only to tariff effects. In other words, this “good news” may not last - and for many consumers and businesses it is more than a teaser than a trend.
What caused the fall in inflation in March?
Lower energy prices were the main driving force. Crude oil prices have slipped due to fears of global economic stagnation, and gasoline has followed the same example. Airlines fares decreased by 5.3%, and hotel prices decreased by 3.5%, indicating a decrease in leisure spending. The prices of used vehicles – a very sensitive component – have decreased by 0.7% and even leisure costs have seen a rare decline.
However, food prices have changed in the opposite direction. Egg prices rose 5.9% due to supply constraints resulting from an outbreak of avian influenza. Food prices rose by category, with significant increases in meat, dairy products and fish. Hedging costs, an obstinate component of inflation, have decreased to a monthly increase of 0.2%, the lowest since 2021, which has provided some relief to the housing sector.
Will tariffs reduce this slowdown in inflation?
Almost sure. According to economists interviewed by Bloomberg and the New York Times, the March CPI data are misleading. President Trump’s latest movement – a sharp escalation of the trade war with China - means that the higher import costs are on the horizon. The most serious blow occurred in early April, just after the ITC data were reduced, when Chinese import duties increased from 104% to 125% amazing, while a 10% universal tariff was applied to almost all other imports.
As James Egelhof, US chief economist at BNP Paribas, said, “We do not consider rates as a single price shock. We consider them to have significant side effects. This includes not only higher costs for imported goods, but also an agitated effect on the overall labour market, wages and services. Companies exposed to higher input costs may increase prices or lower costs elsewhere, possibly through redundancies or wage freezes, further complicating the inflation trajectory.
Why is this important to Americans?
Because tariffs are essentially a tax on imported goods, and businesses rarely fully absorb this cost. Instead, they pass it on to consumers in the form of higher prices. This means that price labels everywhere, from smartphones and slippers to prescription drugs and home furniture are probably on the rise. According to CNN, clothing prices have already risen by 0.7% in March, a likely overview of what is to come.
For households already struggling with high living costs, even modest increases in daily costs can be reflected in budgets. And as wages do not increase quickly enough to offset these expected increases, disposable income will be reduced. This puts pressure on consumption – the engine of the US economy – and could slow down economic growth when it seemed to stabilize.
How does the Federal Reserve respond?
The Federal Reserve is now in an inviable position. The March disbursement could encourage the Fed to maintain growth rates or even consider reductions, especially if economic growth declines. According to Reuters, financial markets now impose 100 basis points per year. However, Fed decision makers are equally aware that the total impact of tariffs on data has not yet been reflected.
“The Fed remains at a difficult point, trapped between a trade war causing strict financial conditions and weight in the economy as inflation takes off,” said Ellen Zentner, Morgan Stanley Wealth Management’s main economic strategy. The central bank closed its tariff reduction cycle in January, but could be forced to resume it in June if data worsen. Its key interest rate is currently between 4.25% and 4.50%.
How do financial markets respond?
Classic. After Trump’s brief 90-day interruption on certain tariffs, markets met briefly, to fall back once the full scope of import duties was clarified. As Bloomberg has indicated, U.S. stocks fell by almost 7% a day after raising 10% of the hopes of tariff withdrawal. The dollar has weakened from a basket of large currencies, and Treasury returns have declined, indicating that the investor does not regret the future economic path.
This volatility should continue. With the already interrupted global supply chains and investor confidence, even a single tweet or policy change could lead to significant market movements. As Elyse Ausenbaugh of J.P. Morgan Wealth Management pointed out, “even with the drop in the tariff temperature for now, the uncertainty has not been resolved”
Which sectors are the most vulnerable?
Several. Retailers, particularly those dependent on Chinese imports such as clothing and electronics, will be among the most affected. The automobile sector is another critical sector: motor vehicle bonds remain at 25%, and the used car market is tightened, owners cling to their vehicles longer. This could increase repair and insurance costs, as James Knightley said. Health care and pharmaceuticals are also in the spotlight, with new obligations that are threatened by medical products and drugs.
Travel and leisure seem to be very short. With the sharp fall in air and hotel fares, discretionary spending is reduced. According to Reuters, Delta Air Lines indicated that the demand for travel had “widely stagnated”. In addition, anecdotal reports suggest that some Canadians are completely boycotting U.S. travel, especially by printing tourism revenues.
Is the labour market stable?
For now, yes, but there are warning signs. A separate report from the Ministry of Labour showed that employment growth remained stable in early April. However, with tariffs set to increase production costs and reduce consumer demand, economists support possible redundancies in sectors exposed to trade. Industries such as manufacturing, retailing and logistics could see the most immediate impact.
However, wages have not risen, which could ease inflationary pressures. As Veronica Clark of Citigroup said, “increased demand will weigh on prices in general but above all on services, partially offsetting the effect of higher costs.” The challenge is to maintain this balance. Excessive tariff inflation, coupled with low demand, could lead to stagnation in the economy, low growth with high inflation, a terrible result for policymakers.
In the future, the March data can serve as a historical note rather than a reliable roadmap. As Robert Frick of the Navy’s Federal Credit Union briefly warned, “we can whistle beyond the cemetery right now.”
In other words, the worst can still be coming. And if the current trend in trade policy does not continue, the next readings of the ICC may reflect a very different – and much more worrying – reality.
