March 2025 CPI Preview
A tariff-ying turn: once deflationary, goods now pose a risk to overall stagflation
Summary: Core goods inflation has accelerated back into positive territory, and it is poised to remain there in the near term. Though March is too early to feel the direct effects of “reciprocal” tariffs, those already in effect, along with expectations of more to come, drove prices paid by manufacturers sharply higher. Combined with rising import prices (which exclude tariffs), the effects of trade will likely feed into core goods inflation over the balance of 2025. Conversely, disinflation is expected to continue for core services (which have the largest CPI weight) as the jobs market loosens, easing wages and subsequent inflationary pressures. For March headline prices, energy will likely provide relief.
Market Implication: After days that feel like weeks and large swings in market valuations for all the major asset classes, it will take a huge outlier print from the upcoming CPI reports for markets to really take notice. That said, they will still be relevant for Fed rate cut expectations. The rates market has been oscillating between 3 to as many as 6 cuts during the extreme price action of late. If we get a number that is shows early signs that tariff pricing is being pulled forward and that inflation remains sticky, we can go back to pricing in only 2-3 cuts ahead. So, there is asymmetrical risk that rates go back into the old range pre-tariff shock.
