US Mar-25 inflation falls to 2.4%; core inflation hits 4-year low

11 Apr 2025 , 11:31 AM

INFLATION EASES 40 BPS, BUT TARIFFS REMAIN THE OVERHANG

In the last 2 months, the combination of lower core inflation and lower fuel inflation has triggered a 60 bps fall in US consumer inflation from 3.0% to 2.4%. Of course, this cannot be taken as a decisive trend since the Trump tariffs are yet to be factored in. What is truly gratifying is that the sticky core inflation touched a 4-year low of 2.8% in March 2025. This level was last seen in March 2021. While Trump has announced a 90-day moratorium on reciprocal tariffs, the imports are China are still being subjected to tariffs at 125%. Hence, the FOMC is likely to be cautious when it comes to cutting rates further. After all, it would want to ensure that it has enough options in its arsenal, if tariffs create a problem.

FOOD HIGHER, BUT ENERGY AND CORE INFLATION EASE AGAIN

March 2025 saw a sharp 40 bps spike in food inflation to 3.0%. However, energy prices deflated further into negative, but the real story was the sharp fall in core inflation.

Inflation Basket Category	Mar 2025 (YOY)	Feb 2025 (YOY)	Inflation Basket Category	Mar 2025 (YOY)	Feb 2025 (YOY)
Food Inflation	3.00%	2.60%	Core Inflation	2.80%	3.10%
Food at home	2.40%	1.90%	Commodities less food and energy	-0.10%	-0.10%
·          Cereals and bakery products	1.10%	0.30%	·          Apparel	0.30%	0.60%
·          Meats, poultry, fish, and eggs	7.90%	7.70%	·          New vehicles	0.00%	-0.30%
·          Dairy and related products	2.20%	0.80%	·          Used cars and trucks	0.60%	0.80%
·          Fruits and vegetables	-0.70%	-0.20%	·          Medical care commodities	1.00%	2.30%
·          Non-alcoholic beverages	2.40%	2.10%	·          Alcoholic beverages	1.90%	1.70%
·          Other food at home	1.10%	0.10%	·          Tobacco and smoking products	6.80%	6.60%
Food away from home	3.80%	3.70%	Services less energy services	3.70%	4.10%
·          Full service meals and snacks	4.10%	3.70%	Shelter	4.00%	4.20%
·          Limited service meals	3.40%	3.50%	·          Rent of primary residence	4.00%	4.10%
Energy Inflation	-3.30%	-0.20%	·          Owners’ equivalent rent	4.40%	4.40%
Energy commodities	-9.50%	-3.20%	Medical Care Services	3.00%	3.00%
·          Fuel oil	-7.60%	-5.10%	·          Physician Services	2.90%	2.60%
·          Gasoline (all types)	-9.80%	-3.10%	·          Hospital Services	3.70%	3.60%
Energy services	4.20%	3.30%	Transport Services	3.10%	6.00%
·          Electricity	2.80%	2.50%	·          Motor vehicle Maintenance	4.80%	5.80%
·          Natural gas (piped)	9.40%	6.00%	·          Motor vehicle insurance	7.50%	11.10%
Headline Consumer Inflation	2.40%	2.80%	·          Airline Fare	-5.20%	-0.70%

Data Source: US Bureau of Labour Statistics

In the US, the CPI inflation acts as a lead indicator for PCE inflation, which sets the tone for Fed rate action. Here is what we read.

• Food inflation in Mar-25 spiked by 40 bps to 3.0%. Upward pressure came from cereals and dairy products; slightly offset by fruits and vegetables prices.
• Energy inflation in Mar-25 weakened by 320 bps to -3.3%. Downward pressure came from fuel and gasoline; slightly offset by piped gas and electricity.
• Core inflation in Mar-25 weakened by 30 bps to 2.8%. Downward pressure came from medical care, airfare, and motor insurance; slightly offset by tobacco and beverages.

While headline CPI inflation for Mar-25 has eased 40 bps to 2.4%, the respite has come from energy and core inflation. However, tariff impact is yet to be factored in.

MARCH 2025 MOM INFLATION DIPS TO -0.1%

Here is the month-on-month (MOM) inflation for last 6 months.

Month	Food (MOM)	Energy (MOM)	Core (MOM)	Headline (MOM)
Oct 2024	0.2%	0.0%	0.3%	0.2%
Nov 2024	0.4%	0.2%	0.3%	0.3%
Dec 2024	0.3%	2.6%	0.2%	0.4%
Jan  2025	0.4%	1.1%	0.3%	0.5%
Feb  2025	0.2%	0.2%	0.2%	0.2%
Mar  2025	0.4%	(2.4)%	0.1%	(0.1)%

Data Source: US BLS (negative figures in brackets)

The headline MOM inflation has eased by 30 bps to -0.1%; and is now lower by 60 bps in the last 2 months. The trends from yoy and MOM inflation are approximately the same; with both measures showing pressure on food prices, but a sharp easing of energy and core inflation. However, the concern is that if the reciprocal tariffs on China continue, and if the tariffs on other countries are brought back after 90 days, then we could see a spike in food inflation and also core inflation. Weak energy prices may be reflective of a slowdown.

CME FEDWATCH – MORE OPTIMISTIC ABOUT RATE CUTS

Here is how the CME Fedwatch (based on implied probabilities in Fed Futures trades) probabilities look like after Jerome Powell’s testimony to the Congress.

Fed Meet	200-225	225-250	250-275	275-300	300-325	325-350	350-375	375-400	400-425	425-450
May-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	Nil	34.9%	65.1%
Jun-25	Nil	Nil	Nil	Nil	Nil	Nil	Nil	29.3%	60.2%	10.5%
Jul-25	Nil	Nil	Nil	Nil	Nil	Nil	24.2%	54.9%	19.1%	1.8%
Sep-25	Nil	Nil	Nil	Nil	Nil	17.0%	45.7%	29.7%	7.0%	0.5%
Oct-25	Nil	Nil	Nil	Nil	7.3%	29.3%	38.9%	20.0%	4.2%	0.3%
Dec-25	Nil	Nil	Nil	3.6%	18.8%	34.3%	29.0%	11.7%	2.2%	0.1%
Jun-26	0.1%	1.0%	5.2%	15.1%	26.6%	28.0%	17.2%	5.8%	1.0%	0.1%
Dec-26	0.4%	2.2%	7.4%	16.4%	24.5%	24.4%	15.9%	6.7%	1.8%	0.3%

Data source: CME Fedwatch

After the recent fall in inflation, the probability of rate cuts has gone up, although the tariffs on China and the limited 90-day pause on tariffs remains an overhang.

• By Jun-25, probability of minimum 25 bps rate cut has gone up sharply to 89.5%.
• By Dec-25, probability of minimum 75 bps rate cut has gone up sharply to 86.0%.
• By Jun-26, probability of minimum 100 bps rate cut has gone up sharply to 75.9%.
• By Dec-26, probability of minimum 100 bps rate cut is up marginally at 74.3%.

While 2026 may not be too reliable due to tariff uncertainty; the consensus appears to be 75 bps rate cut by end of 2025 and just another 25 bps rate cut in 2026!