When will tariff inflation become apparent?

Event

On April 10, 2025, the U.S. Bureau of Labor Statistics released: March CPI month-on-month -0.1% (previous value 0.2%), core CPI month-on-month 0.1% (previous value 0.2%); CPI year-on-year 2.4% (previous value 2.8%), core CPI year-on-year 2.8% (previous value 3.1%).

Key Points

The March U.S. CPI was lower than expected. Aside from rising food prices, energy commodities, rent items, and used car prices all showed signs of cooling. However, recently Federal Reserve officials have stated that it is still necessary to cautiously observe the impact of tariffs on inflation, and the true impact of tariffs will only begin to manifest from April, so this inflation data remains a secondary contradiction in the market.

1) The U.S. March CPI year-on-year fell to 2.4% (previous value 2.8%), lower than the market expectation of 2.5%. Brent crude oil prices fell in early March, dropping to around $62.8 per barrel as of April 9. The energy component of the March U.S. CPI significantly decreased month-on-month to -2.4% (previous value 0.2%). Breaking it down, energy commodity prices fell sharply month-on-month to -6.1% (previous value -0.9%), with gasoline at -6.3% (previous value -1.0%) and fuel oil at -4.2% (previous value 0.8%). Energy services rose month-on-month to 1.6% (previous value 1.4%), with electricity at 0.9% (previous value 1.0%) and gas services at 3.6% (previous value 2.5%).

2) Food price increases expanded, with March food prices rising 0.4% month-on-month (previous value 0.2%) and 3.0% year-on-year (previous value 2.6%). Among these, household food prices rose 0.5% month-on-month (previous value 0.0%), and non-household food prices rose 0.4% (previous value 0.4%). Due to the avian influenza outbreak, egg prices rose 5.9% month-on-month (previous value 10.4%) and 60.4% year-on-year (previous value 58.8%), but the U.S. Department of Agriculture monitoring indicates that egg prices have begun to decline and return to normal levels.

3) Rent items continued to slow down. March rent items rose 0.2% month-on-month (previous value 0.3%) and fell to 4.0% year-on-year (previous value 4.2%). Among these, owners' equivalent rent rose 0.4% month-on-month (previous value 0.3%) and remained flat year-on-year at 4.4% (previous value 4.4%); primary residence rent rose 0.4% month-on-month (previous value 0.3%) and year-on-year at 4.4% (previous value 4.4%). Prices for lodging fell to -2.5% year-on-year (previous value 2.0%) and -3.5% month-on-month (previous value 0.2%), with hotel and other lodging prices falling to -3.7% year-on-year (previous value 1.7%) and seasonally adjusted month-on-month slowing to -4.3% (previous value 0.2%). The decline in oil prices combined with a slowdown in travel demand has led to an expanded drop in airfare prices, which fell -5.2% year-on-year in March (previous value -0.7%). The overall services CPI in March rose 0.1% month-on-month (previous value 0.3%), with medical care services rising 0.5% month-on-month (previous value 0.3%) and transportation services falling to -1.4% (previous value -0.8%) The price of motor vehicle insurance has cooled, recording a year-on-year decrease of 7.5% (previous value 11.1%).

4) In March, the CPI for goods (excluding food and energy) turned negative month-on-month at -0.1% (previous value 0.2%), and year-on-year at 0.0% (previous value 0.0%). Among them, the CPI for new vehicles increased by 0.1% month-on-month (previous value -0.1%), while used cars and trucks recorded a month-on-month decrease of -0.7% (previous value 0.9%). For tariff-sensitive goods, household appliances saw a year-on-year seasonally adjusted decrease of -2.5% (previous value -3.1%), furniture and bedding decreased by -1.8% (previous value -2.1%), toys decreased by -1.5% (previous value -1.9%), and clothing increased by 0.7% (previous value 0.8%). According to the Minutes of the Federal Reserve's March meeting released on April 9, some voting members pointed out that although rental prices have recently slowed, non-housing core inflation remains high; some core goods prices may have been affected by expectations of increased tariffs.

Recent statements from Federal Reserve officials indicate a need for cautious observation of the inflation impact of tariffs, which has weakened the uplifting effect of this period's low inflation data on financial markets. On Tuesday, voting members Adriana Kugler and Austan Goolsbee expressed concerns about supply-side inflation, with Kugler noting initial signs of upward price pressure from tariffs, while Goolsbee stated that large-scale retaliatory tariffs would disrupt supply chains. Subsequently, Richmond Fed President Tom Barkin also mentioned that the impact of tariffs on inflation may not become apparent until June, as businesses typically have 1-2 months of inventory before tariffs take effect.

After the data release, the U.S. Treasury yield curve steepened rapidly, with the 2-year Treasury yield falling to around 3.8%, and the 10-year Treasury yield rebounding slightly after a small decline, fluctuating around 4.3%. Regarding the institutional deleveraging sell-off and soaring Treasury yields in the market this week, Treasury Secretary Janet Yellen stated that it remains a normal market adjustment and does not pose systemic risk. The three major U.S. stock indices adjusted, with the Nasdaq down about 3.4% to around 16,530, and the S&P down 2.8% to around 5,300. The U.S. dollar index weakened to around 101.5.

Looking ahead, we believe that the inflationary risks in the U.S. for April and even Q2 remain controllable, with the real impact likely to occur in the second half of the year. First, the actual GDP annualized rate predicted by the Atlanta Fed for Q1 was -2.4% due to a surge in imports, indicating that import volumes may plummet in Q2; second, OPEC+’s increase in production has caused international oil prices to plummet, leading to negative energy inflation in the U.S.; third, the U.S. has not yet imposed tariffs on neighboring countries, so the impact on residents' daily necessities remains relatively controllable. However, some of the tariff buffers will dissipate in the second half of the year due to the expiration of the 90-day exemption and the digestion of imported goods stockpiled in Q1, and if oil prices cannot maintain low levels, the inflationary impact of tariffs will surface in the second half of the year.

Additionally, based on the assessment of Trump's style since taking office, at the end of the "Hundred Days of New Policy," it is highly likely that Trump will shift towards active domestic policies, which may temporarily reverse expectations of an economic recession in the U.S. Once the above transformation occurs, it is not ruled out that U.S. stocks and the U.S. dollar may rise together in Q2. However, in the long term, we still adhere to the viewpoint in "Technological Revolution, Wealth Effect, and Economic Fluctuations" (March 4 report) that there is a high probability of a significant decline in U.S. stocks similar to that of 2000 in the next 1-3 years.**

Risk Warning: Federal Reserve monetary policy may exceed expectations.

Authors of this article: Zhang Jingjing, Zhang Antian, Source: China Merchants Macro Jing Si Lu, Original Title: "China Merchants Macro | When Will Tariff Inflation Become Apparent?"

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