In March, the overall CPI fell by 0.1 percent, as a 6.3 percent plunge in gas prices was sufficient to make the CPI fall for the month. The core CPI rose just 0.1 percent, as a sharp fall in airfares, coupled with declines in prescription drug prices, auto insurance, and used car prices, held the index down. For the last 12 months the overall index was up 2.4 percent, while the core index was up 2.8 percent.

Gas Prices Likely to Fall Again, but Not as Much as in March

The drop in gas prices in March knocked 0.2 percentage points off the CPI for the month. Gas prices are likely to fall again in April, but by a much smaller amount than in March, so its impact on the index will be considerably less.

Oil prices have been very weak in recent weeks, with West Texas Intermediate oil selling for less than $60 a barrel. This decline has not been fully reflected in lower gas prices. It is not clear that this drop will be enduring, since at prices below $60 many US oil fields are unprofitable. But if oil prices do stay near their current level, we should see further declines in gas prices in future months.

Food Price Growth Will Slow

Food prices surged by 0.5 percent in March, driven by big jumps in egg and dairy prices. Egg prices are likely to show a decline in April and dairy prices will be close to flat. Other food items are likely to rise in price, but the increase in the overall index will be in the range of 0.2-0.3 percent, considerably lower than the March rise. The net between falling gas prices and rising food prices should leave the rate of inflation roughly the same between the overall CPI and the core index.

Supply Chain Goods Likely to Show Tariff Related Price Increases

Trump had already raised some import taxes before the start of April and had various start dates and tax levels for different items. While the story is likely to be mixed across items, the general direction will clearly be towards higher prices. The range of items from clothes and appliances to household furniture is likely to show average inflation of 0.5 percent to 1.0 percent. The general price trend in these items before the pandemic was flat to slightly downward. This category of items, which was very important in the pandemic inflation, comprises a bit less than 13 percent of the overall CPI and 16 percent of the core index.

Rental Inflation Will Continue to Slow

We are finally getting back to rental inflation rates along the lines of what we saw before the pandemic. The rent proper index rose 0.3 percent in March, while the owners’ equivalent rent index rose 0.4 percent. Over the last year they have risen 4.0 percent and 4.4 percent, respectively.

The indexes of tracking rents of marketed units continue to show lower rates of rental inflation, generally less than 2.0 percent. The BLS New Tenant rent index actually fell by 2.0 percent over the last year. We should expect further slowing of these indexes with both likely to show inflation of 0.3 percent for April. Going forward, rents will likely be a dampening factor on the overall inflation rate

Inflation for Vehicles Will Increase

Inflation for the new and used vehicle indexes was surprisingly tame in March with the new vehicle index rising just 0.1 percent and the used vehicle index actually falling 0.7 percent. That is unlikely to be repeated. With many people buying in anticipation of tariffs – and in some cases, tariffs actually hitting – we are likely to see rises of around 0.5 percent in both indexes in April.

The Drop in Airfares Is Likely Over

The 5.3 percent drop in airfares in March knocked 0.05 percentage points off the CPI for the month. It followed a decline of 4.0 percent in February. This pushed airfares down 5.2 percent from their year ago level. They are now almost 13 percent below (in nominal terms) their level from a decade ago. While slowing traffic is weakening demand, it is unlikely we will see another sharp drop in the index in April, and may see some increase.

Auto Insurance Prices Will Reverse the March Decline

Auto insurance prices fell 0.8 percent in March, only the second monthly decline in the last three and half years. This was almost certainly an anomaly. The factors that have driven up insurance prices – higher repair costs and more climate-related damage to cars – have not gone away. This component has been a major factor in contributing to inflation over the last year, rising by 7.5 percent and adding 0.21 percentage points to the inflation rate over the last year. It is likely to rise by around 0.5 percent in April.

Medical Services Will Again Show Substantial Inflation

Before the pandemic, medical services typically outpaced the overall CPI by close to a percentage point. Inflation in medical services slowed sharply in the pandemic and recovery, however they have re-accelerated in the last year. The index rose 0.5 percent in March and is up by 3.0 percent over the last year.

Hospital services account for the bulk of this increase, with the index rising 3.7 percent over the last year and 0.5 percent in March. We will likely see the medical services index increase by 0.4 percent in April.

Tariff Inflation Starting to Hit in April

We did not see most of the tariffs kick in yet for the full month, so whatever inflationary impact we see will just be the beginning of the full effect. We also don’t know what will happen when the 90-day negotiating period ends and ostensibly the tariffs bounce back to their pre-pause level for countries which did not agree to a deal.

It is also likely that some of the retaliatory measures, such as China blocking exports of key inputs, will also have an inflationary impact. Furthermore, if shortages develop due to the virtual halting of trade with China, and it affects not just consumer goods but important production components, then we will see a further inflationary impact. In short, whatever bad news we get on inflation in April is likely to just be the beginning.