The core CPI in the USA has dropped to its lowest point in four years! However, under the tariff storm, the "inflation monster" is brewing a resurgence.

According to Zhito Finance APP, the core CPI inflation in the USA slowed more than expected year-on-year and month-on-month in March. For the financial markets, the good news is that the inflation data, which cooled unexpectedly in March, provides consumers with a brief respite before the radical global tariff policies of Trump, which may significantly raise prices, are officially implemented. At the same time, it may also greatly alleviate the trend of selling stocks and bonds.

Undoubtedly, the bad news for the market lies in the latest breakdown data indicating that the core drivers of US inflation in recent years – services like housing, as well as food price inflation – remain highly persistent. More importantly, this coincides with Trump initiating at least a 10% general tariff on a global scale in April, along with tariffs as high as 25% on global autos, steel, and Aluminum products. The steel and Aluminum tariffs are especially critical for the production of various core goods in the USA. Hence, the unexpectedly cooling CPI data in March may represent the last moments of comfort before the "inflation beast" returns.

The CPI inflation data released by the US Bureau of Labor Statistics on Thursday indicates that after excluding the volatile food and energy costs, the core Consumer Price Index (core CPI) in the USA increased by only 0.1% month-on-month in March, marking the smallest increase in nine months. The core CPI increased by 2.8% year-on-year, reaching the lowest annual growth level in four years.

The core CPI is the most closely watched inflation data in the USA, serving as an important reference for the market to set expectations for a Federal Reserve rate cut. The overall CPI decreased by 0.1% month-on-month, marking the first month-on-month decline in nearly five years, while the overall CPI rose by 2.4% year-on-year, falling short of the market’s general expectation of a 2.5% increase.

After the release of better-than-expected CPI data, bets in the Interest Rates futures market regarding a Federal Reserve rate cut did not show any significant increase or decrease. Most traders still wager on the Federal Reserve cutting rates three times this year, with each cut being 25 basis points. This highlights that the focus of traders in the Interest Rates futures market and the bond market has completely shifted to inflation data for April and beyond, raising concerns that tariff policies may allow the inflation beast to sweep across the USA once again.

Samuel Tombs, the chief US market economist at Pantheon Macroeconomics, stated in a report: "Experience with washing machine tariffs in 2018 indicates that consumer prices take three months to react to new tariffs, after which the transmission speed will be very fast." He added that the CPI report in May should reflect this impact.

The good news is that the CPI inflation in March cooled more than expected.

Detailed data on inflation shows that the substantial decline in energy costs, used car and airfare prices, along with the significant slowdown in Outfit price growth, jointly pushed the overall CPI down. After the data was released, Treasury yields fell, S&P 500 Index futures continued to decline, and the dollar extended its intraday depreciation, indicating that the March cooling of CPI did not ease market worries about the potential for stagflation in the USA.

Although this data brings temporary relief to consumers who have been bearing high price pressures for a long time, the wide-ranging tariffs implemented by the Trump-led government returning to the White House may make this Bullish sentiment short-lived.

Although President Trump announced on Wednesday local time a 90-day pause on the so-called "reciprocal tariffs" imposed on most countries (less than 24 hours before the effective date), most countries around the world still face at least a 10% tariff on imported goods. Last month, the USA already imposed a 25% tariff on imported Steel and Aluminum, and this month has begun imposing tariffs of up to 25% on global Autos, while tariffs on imports from China have soared to 125% due to Peking's countermeasures this week.

Although President Trump has stated that he has authorized a 90-day "reciprocal tariff suspension" concession for most countries globally, tariffs are still imposed at 10% during this period.

For the CPI in April and beyond, the upward expectations have significantly heated up, as some rising import costs will ultimately be passed on to consumers in the USA, with giants like Target and Volkswagen warning the public about imminent price increases. This uncertainty keeps Federal Reserve officials on the sidelines, waiting for further clarity on the impact of tariffs on inflation and the overall economy in the USA.

Even though some tariffs were implemented in March, prices for categories with a high dependence on China, such as toys, home appliances, and tools, still saw a decline. The CPI report showed that core Commodity prices dropped by 0.1% month-on-month in March, marking the first decline since August last year.

However, when the market focuses on the effects of tariffs on Commodity prices, a key driving force of inflation in recent years - housing costs (the largest sub-category of service inflation) - has shown a moderate increase, reflecting the strong stickiness of inflation. Coupled with the extremely negative expectations of tariffs, the market's outlook for inflation in the USA is very logically heating up.

In terms of sticky service sector inflation, in March, hotel lodging prices in the USA experienced the largest drop in over three years, while the owner's equivalent rent (an important subcategory of housing) unexpectedly accelerated to 0.4% month-on-month.

In other service sector indicators, vehicle and household insurance, as well as car rental costs all decreased last month. Bloomberg calculations show that excluding housing and energy, core service prices recorded the largest drop in nearly five years. Although the Federal Reserve emphasizes the importance of this indicator in determining the trajectory of inflation, its calculation is based on a different index system.

In addition, in March, grocery costs in the USA unexpectedly rose 0.5% month-on-month, marking the largest increase since October 2022.

Another inflation indicator, the Personal Consumption Expenditures Price Index (PCE), does not assign excessive weight to housing like CPI, which explains why PCE data, particularly core PCE which excludes energy and food costs, is closer to the Federal Reserve's 2% inflation target. The PPI report to be released this Friday will provide some important clues about the direct impact on March's core PCE data.

CPI breakdown data shows that food prices, which hold a larger weight in the core PCE inflation basket, unexpectedly rose 0.4% for two consecutive months, potentially driving core PCE upward beyond expectations. Another report released on Thursday indicated that the number of initial unemployment claims rose to 0.223 million last week, still hovering near historical lows.

The bad news is that the cooling of inflation may temporarily halt! Wall Street and the Federal Reserve are in agreement that inflation is about to heat up.

David Kelly, Chief Global Strategist at JPMorgan's Asset Management division, stated after the inflation data was released: "This (cooling inflation in March) is the calm before the inflation storm. Tariffs will lead to a slight increase in inflation, and I believe the actual situation of the USA economy will worsen further this year."

According to reports, Goldman Sachs, a major Wall Street firm, has recently raised its core PCE inflation indicator for the end of 2025 by 0.5 percentage points to 3.5%, expecting a high likelihood of rising to 4%, emphasizing that even by 2026, it will be difficult for core PCE to return to the Federal Reserve's targeted 2% goal. In February of this year, the core PCE index showed a year-on-year increase of 2.8%.

Furthermore, Goldman Sachs' latest forecast shows that the economic growth rate in the USA for 2025 will only be 0.5%, with a likelihood of entering recession over the next 12 months as high as 45%. Since Trump announced the imposition of tariffs on April 2, economists from other major Wall Street firms have also significantly lowered their economic growth expectations for the USA and raised their core PCE inflation expectations substantially. Among them, Citigroup predicts that US GDP may only grow by 0.1% in 2025, mainly due to the resurgence of inflation sharply reducing Consumer spending.

Goldman Sachs expects that the Federal Reserve may cut rates three times this year; however, another major Wall Street firm, Morgan Stanley, has a much more hawkish expectation—forecasting that the Federal Reserve will not cut rates this year. Morgan Stanley warns that the market has not yet priced in the imminent recession. Although a US recession triggering a Global economic downturn is not the baseline scenario, it is becoming an increasingly realistic pessimistic scenario. Therefore, the team of economists at Morgan Stanley currently predicts that the inflation resurgence caused by Trump’s tariff policy will keep the Federal Reserve on hold, and there may be no rate cuts at any level in 2025.

Morgan Stanley’s economists emphasize that if the announced tariffs remain in place for a long time, the downside risks to growth will significantly increase, while the upside risks to inflation will also intensify, and it is expected that the inflationary pressures from Trade and immigration policies will not be offset by US fiscal policy measures and deregulation.

Currently, several Federal Reserve officials have issued clear signals through public comments and interviews, ruling out the adoption of 'preventive rate cuts' as an Insurance policy against the slowing US economy. To minimize the upside inflation risks triggered by tariff policies, they may be prepared to keep policy rates unchanged for an extended period.

Alberto Musalem, the President of the St. Louis Federal Reserve with voting rights on monetary policy at the Federal Reserve Open Market Committee (FOMC) in 2025, stated on Wednesday that as businesses and households accept the price increases brought about by new tariffs, US economic growth may be 'significantly' below trend levels, and the unemployment rate is also expected to rise in the coming year. He also indicated that unexpectedly high tariff policies will create severe upward pressure on prices; at the same time, declining business/Consumer confidence and a significant drop in the stock market have impacted household wealth, thereby suppressing spending. All these factors combined are expected to slow the growth rate of the US economy.

Neel Kashkari, President of the Minneapolis Federal Reserve, wrote in an article released on Wednesday morning: 'Given the importance of maintaining stable long-term inflation expectations and the potential uplift that tariffs may bring to short-term inflation, the threshold for rate cuts is higher even in the context of a weakening economy and possibly rising unemployment rates. Because of tariffs, the barriers to altering the federal funds rate in any way have increased.'

Jeremy Schwartz, an economist at Nomura Securities in the USA, stated that the Federal Reserve may only take more aggressive actions in the context of large-scale layoffs, a significant increase in the number of unemployment claims, and a substantial rise in the unemployment rate. He expects a rate cut in December this year. He remarked, "Inflation is not only too high, but has also been above target for years and will adversely affect the target. In this context, cutting rates would indeed jeopardize the Federal Reserve's credibility in bringing inflation back to its target level."