Tonight's US CPI - the last "mild" inflation data under the tariff storm?

The U.S. March CPI is expected to record the smallest month-on-month increase in eight months, with declining energy costs partially offsetting core inflation pressures. However, Trump's tariff measures have been impacting prices for clothing, furniture, and electronics since February, leading to significant upside risks in inflation data in the coming months.

At 8:30 PM Beijing time on Thursday, the U.S. Bureau of Labor Statistics will release the March Consumer Price Index (CPI) report. According to economists surveyed by Bloomberg:

The U.S. March CPI is expected to increase by only 0.1% month-on-month, marking the smallest increase in eight months. Meanwhile, the core CPI, excluding food and energy, is expected to rise by 0.3% month-on-month, slightly higher than February's 0.2%.

Year-on-year, the March CPI is expected to be 2.5%, down from 2.8% in February; the core CPI year-on-year is expected to be 3.0%, also lower than February's 3.1%.

The March CPI report will convey mixed messages, Bloomberg economists Anna Wong and Chris G. Collins stated. On one hand, inflation in the service sector may continue to slow or even accelerate; on the other hand, "reciprocal tariffs" are beginning to push up commodity prices, and the April CPI data, to be released on May 13, will "provide more evidence."

Service Sector Inflation Continues to Improve, Food Price Pressures Decline

Samuel Tombs and Oliver Allen from consulting firm Pantheon Macroeconomics expect that as demand for flights and hotels weakens, partially offsetting growth in other categories, the trend of service sector inflation will continue to slow in March. They noted that "relatively few service businesses have raised prices recently."

BNP Paribas also expressed similar expectations. With annual wage growth stagnating, the bank anticipates that inflation in many service categories in the March CPI report will show "little change."

Analysts Andy Schneider and Britney Jackson from the bank stated in a report:

Given the significant decline in consumer confidence, we cannot rule out the possibility that the weak readings for flight and hotel inflation in February reflect a bleak outlook for these industries. We will monitor whether this weakness persists in March.

Food inflation pressures have also eased, particularly as egg prices, which surged at the beginning of the year, may show signs of retreat in March. Economists at Morgan Stanley stated in a report:

The recent decline in avian influenza cases and the ongoing adjustment in wholesale prices suggest that egg prices will decline starting in April, at least before the new tariffs begin to affect domestic food prices, which will lower household food CPI In addition, according to the latest forward-looking report released by Goldman Sachs, used car prices are expected to decline by 0.5% month-on-month in March, reflecting a decrease in auction prices, while new car prices are expected to rise only by 0.1% month-on-month. Auto insurance costs are expected to increase by 1.0% month-on-month.

Goldman Sachs also predicts that the core CPI will rise by 0.27% month-on-month in March (lower than market expectations) and increase by 3.03% year-on-year (slightly higher than market expectations). For the overall CPI, Goldman Sachs expects a month-on-month increase of 0.08% (slightly lower than market expectations), reflecting a 0.2% increase in food prices, but a significant decrease of 2.5% in energy prices.

Tariff Effects Begin to Emerge, Clothing and Electronics Hit Hardest

Although Trump has just announced a 90-day delay in implementing "reciprocal tariffs" on dozens of trading partners, some tariffs that began in February have already started to affect domestic inflation in the United States.

Both Goldman Sachs and Deutsche Bank expect that clothing, furniture, and electronics prices will accelerate in the March CPI report.

UBS is more optimistic about the impact of tariffs. Analyst Alan Detmeister stated in a forward-looking report that based on experiences from Trump's first term, the initial round of tariffs may take longer to pass on to consumers. The bank predicts that prices of goods excluding food, energy, and transportation will continue to rise over the next six months.

Based on the transmission effects observed during the 2018-2019 tariff war, we expect the tariff increases in February and March to have the greatest impact on month-on-month changes in U.S. CPI during the period from May to August.

In summary, tonight's CPI data may be the last relatively mild inflation report for the next few months. As tariff policies are fully implemented, inflation data may face upward pressure.

Paving the Way for a Fed Rate Cut in May?

Citigroup's latest research report predicts that the core CPI in the U.S. will only grow by 0.22% month-on-month in March, lower than the previous general market expectations, which may pave the way for the Fed's first rate cut in May. Although inflation data is mild, there is a serious risk of rising commodity prices in the coming months due to tariff increases.

If the March inflation data is below market consensus, it may allow Fed officials to feel more comfortable cutting rates in May in response to sharply deteriorating growth risks, which remains our base case prediction.

However, in the face of inflation risks brought about by Trump's tariff policies, the Fed has made it clear that it will prioritize combating inflation rather than preventive rate cuts.

Currently, several Fed officials have sent clear signals through public comments and interviews, ruling out preventive rate cuts as an insurance policy against economic slowdown. To minimize the upward inflation risks triggered by tariff policies, they may be prepared to keep policy rates unchanged. Fed Chairman Powell has stated that while tariffs are likely to cause a temporary rise in inflation, their effects may also be more lasting.

Analysts point out that Fed officials have doubled down on their commitment to controlling inflation and the inflation expectations of the American public, a stance that is likely to keep them on hold unless the unemployment rate rises significantly Goldman Sachs trader Joseph Briggs stated:

After alleviating concerns about an imminent recession, tomorrow's CPI data becomes more important, as the Federal Reserve will be more sensitive to inflation in a context of weak but non-contracted economic growth.

After being hit hard by the tariff war, U.S. stocks may be more tolerant of tonight's CPI

Following Trump's announcement to postpone the implementation of "reciprocal tariffs" for 90 days on some trading partners, market attention towards tonight's CPI data has increased.

According to Goldman Sachs ETF/basket trading volume trader Shawn Tuteja, if the CPI data is slightly below expectations, the market may continue to rise; if it is above expectations, the market may also be relatively tolerant.

From a trading perspective, if we announce a slightly lower CPI data tomorrow, I think we may see the stock market continue to rise, as these bear market rallies often exceed expectations. If we announce higher inflation data, I think the market can ignore it, as people need to continue to support, and we believe implied volatility still has room to decline (the VIX will expire next week, and maintaining a VIX above 30 is very difficult with some uncertainties regarding tariffs being eliminated).

Goldman Sachs index volatility trader Joe Clyne pointed out that market options trading shows that investors' expectations for stock market volatility after the CPI announcement have dropped to 2.3%, indicating that the market has partially digested the impact of tariff policy adjustments. However, if inflation data unexpectedly rises, it may lead to a partial reversal of today's market rebound.

After tonight, investors need to closely monitor Friday's University of Michigan Consumer Sentiment Index, not only because the Federal Reserve closely watches inflation expectations, but also because the survey's response to employment market sentiment is crucial.

Risk Warning and Disclaimer

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