CPI in April reported less than expected in the US, which saw its lowest levels since February 2021. The slowdown in inflation comes as US President Trump’s tariffs started to impact the US economy and caused the economy to cool.
While the April figures show a drop off in inflation, the potential impact of ongoing tariff negotiations, particularly with China, could bring uncertainty for the months ahead.
Breaking Down the Report
Headline CPI came in at 0.2% MoM in April, less than expected, which brought CPI YoY down to 2.3%, also less than expected at 2.4%. This marked the lowest reading since 2021.
Core CPI, which excludes food and energy prices, also came in at 0.2% MoM, again less than expected, with the YoY rate at 2.8%, matching estimates. ⁽¹⁾
Compared to March, the monthly readings were slightly higher, but they remain far below the peak inflation rates seen three years ago.
Price Movements Across Sectors
Price changes were mixed across various sectors. Energy prices rebounded with a 0.7% increase after a 2.4% decline in March. Food prices, however, declined by 0.1%. Egg prices declined 12.7%, though they remained 49.3% higher than a year ago due to supply issues. ⁽²⁾
Other sectors showed varied trends. Used vehicle prices fell 0.5%, marking their second consecutive decline, while new vehicle prices held steady. Apparel costs dropped 0.2%, but medical care services and insurance saw upticks of 0.5% and 0.4%, respectively. Motor vehicle insurance also rose by 0.6%, reflecting ongoing pressures in certain service sectors. ⁽³⁾
The Tariff Wild Card
President Trump announced 10% tariffs on all US imports on “Liberation Day” back in April. He intended to put additional “reciprocal” tariffs on trading partners. Recently, though, Trump has backed off his position, with the most dramatic development being a 90-day stay on aggressive tariffs against China while the two sides enter further negotiations.
The administration also agreed to reduce duties on Chinese goods to 30% and lower tariffs on US goods imported into China from 125% to 10% for the next 90 days.
10% baseline tariffs are still in effect regardless of this easing. Although what happens next depends on the success of the negotiations, economists caution that these actions could refuel inflation in the summer. Although there is still uncertainty, the temporary tariff reductions might reduce short-term price pressures. ⁽⁴⁾
Markets expect the president’s softening position to lower the chances of interest rate cuts this year.
Since the China developments, the market has pushed out the first cut to September, with just two likely this year as the central bank feels less pressure to support the economy. Inflation has held above the Fed’s 2% target now for more than four years.
Market Reactions
The S&P 500 rose more than 1% while the Nasdaq 100 almost rose 2% after the release. Traders analyzed new inflation data and considered what it might mean for monetary policy. The Dow Jones, however, was down as much as 318 points before a slight recovery left the index trading 180 points down from its daily high at 42,350.
Traders had been pricing in 3 rate cuts for 2025, with the first 25-bps cut due in June. Recent developments and economic data have decreased the speculation of 3 rate cuts to 2 rate cuts for 2025, with the first one pushed to September. ⁽⁵⁾
Looking Ahead
The April CPI report gave some relief, with inflation declining to its lowest level in over four years. However, the process of Trump’s tariff policies and global trade changes could bring some risks that could disrupt this trend.
As the Federal Reserve is in a wait and see stance in order to assess upcoming data, policymakers face a delicate balancing act. Financial markets await clues on trade negotiations, which could have an impact on inflation throughout 2025.
