CPI report extends the good news from February but tariff impacts still to come

The US dollar is falling today and one of the reasons is that March CPI was lower than expected. That should give the Fed and opportunity to cut rates, particularly with oil prices down another 4% today in a give-back of yesterday's jump.

CIBC breaks down today's CPI and notes that it's the second consecutive downside surprise. They note that core non-housing services inflation dropped sharply to 2.9% from 3.8% and is at the lowest since 2021.

"Although that's good news for the Fed, clearly the subsequently announced increases in tariffs on China will work to boost inflation and uncertainty remains following the 90-day pause in tariffs for other countries that was announced, which still leaves the 10% baseline rate intact for that period," CIBC writes.

That's the rub and so far indications from Fed officials are that they're not entirely willing to look through tariff impacts.

A big driver of lower CPI was lower gasoline but they also noted a 0.8% decline in car insurance rates, which have been a persistent source of inflation. On the other side, food inflation was 3.0% in March from 2.6% previously.

Running counter to the coming tariff impacts is the long-seen decline in rents and mortgage costs that working its way into the numbers. This month though the drop in shelter was solely due to a 4.3% m/m drop in hotel prices, which is a worrying sign for travel demand.

CIBC writes:

This report extends the good news received on inflation in the prior month, but clearly the ramping up of tariffs since then will start to come through in the data ahead, as firms will be passing on higher costs to consumers, in line with anecdotal evidence and what was seen in the 2018/19 trade war with China. Although tariffs on countries of above 10% have been paused for 90 days (ex. China and some other exceptions), the lingering uncertainty will continue to weigh on sentiment and investment decisions in the US, leaving the Fed with the challenge of balancing upside inflation risks with a deteriorating labor market. We expect the Fed will remain on hold in the first of this year and remain very data-dependent throughout the year.

Current market pricing is for 102 bps in easing in the year ahead, with a cut fully priced in at the June 18 meeting.