Key Takeaways

March was the best month for consumer prices in nearly five years, as falling gas prices helped out household budgets despite increases for other necessities.

Consumer prices fell 0.1% in March, according to the Consumer Price Index, the Bureau of Labor Statistics said Thursday. Gas prices fell, contributing to a fall in overall inflation. Falling gas prices outweighed a jump in food costs: Groceries got 0.5% more expensive in March.

The overall CPI rose 2.4% over the year, its lowest annual increase since September. Forecasters had expected a 2.6% annual increase, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal . "Core" inflation, which excludes food and energy, rose 0.1% over the month, making for a 2.8% increase over the year. Falling car insurance and airline ticket prices helped keep core inflation running cooler than expected: the median forecast called for 3% year-over-year core inflation.

The report showed consumer prices were headed in the right direction in March despite several of President Donald Trump's tariffs having taken effect that month. Some tariffs against Canada and Mexico went into effect in March , and there was a 20% increase in tariffs against China. Since then, Trump has hiked tariffs against China to 125%, imposed a 25% tariff on auto imports, and implemented a global 10% tariff against products from nearly every country in the world. Economists expect those import taxes to push up consumer prices in the coming months, potentially stoking inflation.

"This report could be like reading an old newspaper from a different reality,"  David Russell, head of market strategy at online brokerage firm TradeStation, wrote in a commentary.

A drop in consumer prices would normally be music to the ears of Federal Reserve policymakers, who adjust the nation's monetary policy to keep inflation running at an annual rate of around 2%. Fed officials have held their benchmark fed funds rate at a higher-than-usual level in recent months in an effort to extinguish the last embers of the post-pandemic burst of high inflation.

Fed officials anticipate lowering their key fed funds rate, which influences interest rates on all kinds of loans, in response to falling inflation. However, Trump's tariff campaign could make them reluctant to do so. Fed officials have said they'll stay in "wait and see" mode until the impact of the tariffs becomes clear.

"March’s inflation data is encouraging but will do little to calm nerves at the Federal Reserve as they wait to parse through the effects of dramatic changes in U.S. trade policy," Matt Colyar, an economist at Moody's Analytics, wrote in a commentary.

When Will Government Data Show Tariff Impact?

Although tariffs were in effect in March, it may take a while before they show up in price tags and inflation data if past trade wars are anything to go by.

In 2018, when Trump raised tariffs on washing machines, it took three months for the import taxes to be passed on to consumers, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a commentary.

"This suggests May is the earliest that the CPI data will start to pick up in response to the tariffs," Tombs wrote.

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