U.S. Inflation Risks Rise Amid Tariff Changes

U.S. consumer prices are expected to have risen slightly in March, though inflation risks are increasing following President Donald Trump’s decision to escalate tariffs on Chinese goods while reducing duties on imports from other countries.

The U.S. Labor Department’s report, set to be released Thursday, is anticipated to capture only a small portion of the initial impact from Trump’s tariff policies, which include a 20% tariff on Chinese goods and new levies on steel and aluminum imports. Trump has positioned tariffs as a mechanism to boost revenue for his proposed tax cuts and to revive the struggling U.S. industrial sector.

Sarah House, a senior economist at Wells Fargo, noted, “The March CPI data will feel dated, but it should provide insight into how the evolving trade environment was beginning to affect pricing.”

Economists predict the consumer price index (CPI) will have edged up by 0.1% in March, according to a survey, with lower energy costs and the diminishing effects of early-year price hikes contributing to the modest increase. The CPI saw a 0.2% gain in February.

Year-over-year, the CPI is forecast to have risen by 2.6% through March, down from a 2.8% increase in February.

In a significant policy move, President Trump announced on Wednesday that he would temporarily reduce tariffs on many countries to 10%, just one day after new duties led to market instability. However, Trump further raised tariffs on Chinese goods to 125% from 104% in response to China’s retaliatory tariffs of 84% on U.S. exports. The European Union, which also imposed its own tariffs, was not directly addressed in Trump’s statement.

Paul Ashworth, chief North America economist at Capital Economics, commented, “Given the market reaction, we expect Trump to continue extending the ‘pause’ on tariffs, which may ultimately resemble the 10% universal tariff he promised during his campaign.” Ashworth predicts that U.S. inflation could peak at around 4% as a result of these policies.

Minutes from the Federal Reserve’s March meeting, released on Wednesday, indicated that policymakers were nearly unanimous in their view that the U.S. economy faces the risk of both higher inflation and slower growth. The Fed’s meeting notes highlighted that the impact of higher tariffs was likely to push inflation higher, with several contacts already reporting cost increases, possibly in anticipation of future tariff hikes.

Financial markets are expecting the Federal Reserve to resume interest rate cuts in June, following a pause in January to assess the effects of the administration’s policies. The current policy rate remains in the 4.25%-4.50% range.

Excluding the volatile food and energy sectors, the core CPI is expected to have risen by 0.3% in March, following a 0.2% increase in February. Year-over-year, core inflation is projected to have increased by 3.0% in March, slightly down from 3.1% in February.

Despite rising goods prices, inflation in services is not expected to see significant increases, as a cooling labor market is keeping wage growth in check. However, the surge in goods inflation is expected to offset the anticipated disinflation in services.