Why March’s Good Inflation News Won’t Last, Thanks to Tariffs

The March Consumer Price Index showed inflation coming in softer than expected, in large part due to lower gas prices. However, President Donald Trump’s tariffs will gradually feed their way through to the economy and lead to higher inflation, even with the pause announced Wednesday.

The Bureau of Labor Statistics reported that the CPI fell 0.1% month over month in March after rising 0.2% in February. Economists forecast that consumer prices would rise 0.1% on a monthly basis in March, according to FactSet’s consensus estimates. Core CPI rose 0.1%, matching the February increase but weaker than the 0.3% rise economists had forecast.

“In the absence of the looming tariff impact, today’s inflation data would bring a sigh of relief,” says Preston Caldwell, senior US economist at Morningstar. “If not for tariffs, today’s data would be teeing the Federal Reserve up for an interest rate cut in May. As it stands, we think the Fed will prefer to wait and see how the tariff shock plays out before cutting further.”

Too Early for Tariffs to Show in Inflation Data

During March, the lower reading on inflation was led by a sharp decline in gas and airline prices. Pharmaceuticals and housing also contributed to the softening of price pressures.

Going into the CPI report, economists had not expected the impact of Trump’s tariffs to filter through to the data for March. “It’s too early for tariffs to be meaningfully impacting inflation,” Caldwell says.

Some tariff increases were initiated in February, such as a 10% hike on China. March saw another 10% applied to China and 25% to some goods from Canada and Mexico. Other tariff hikes, notably lifting the total levy on China to 125%, weren’t initiated until April.

“The flow-through of tariffs into consumer prices won’t be immediate,” Caldwell explains. “Businesses do possess substantial inventories of goods imported before tariffs hit. On the one hand, naïve profit maximization would call for businesses to immediately raise prices on existing inventory, if they know prices are soon to rise anyways. But most prices tend to be sticky for various reasons. And in this instance, companies may move gingerly at first for fear of offending wide swaths of their customer base.”

Bulk of Tariffs Will Hit Consumers

However, Caldwell says it is “inevitable that the bulk of the large cost increases represented by tariff hikes eventually get passed on to the consumer.” Even if tariffs are further cut back in the months to come, he expects a meaningful impact on inflation over the next year.

For the Personal Consumption Expenditures Price Index, which is the Fed’s preferred measure of inflation, Caldwell expects annual inflation to peak around the first quarter 2026, in the range of 3.5%-4.0%. In comparison, he says the March CPI report suggests that on a year-over-year basis, the core PCE should drop to 2.55% for the month—the lowest inflation reading since 2021.