Kiplinger Inflation Outlook: Tariff Effects Still to Come

last updated 10 April 2025

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Headline inflation dropped again in March, to 2.4% from 2.8% in February, and core inflation (prices excluding food and energy) also slipped, to 2.8%, from 3.1%. Those reductions were more than economists had expected. Gasoline prices dropped 6.3%, and airfares declined 5.3%, after a 4.0% decrease in February, because of the lower cost of aviation fuel. Both shelter and medical services costs continued at a moderate rate of increase. New-vehicle prices edged up, but used-vehicle prices declined 0.7%, breaking a six-month string of increases. The price of groceries rose a largish 0.5% from a month earlier, and 2.4% over the past year. Egg prices were up again, and have soared 60% over the past 12 months. The avian flu has severely reduced flocks at egg-laying chicken farms. Beef prices continued to rise and are up 8.6% over the past year. The cost of dining out continued to rise at a moderately strong pace and is up 3.8% over the past year.

New tariffs are likely to push up prices soon. Despite the 90-day pause in the highest tariffs, the 25% duties on imported cars and auto parts will raise both the average prices of new and used vehicles, and the cost of vehicle repair and insurance. The 145% tariff on China and 10% tariff on most other countries will affect prices of clothing, electronics and many other goods.

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March’s progress on inflation will please the Federal Reserve but is unlikely to give the central bank enough reason to cut interest rates when it meets on May 7. The Fed will want to see the effects of tariffs on inflation over the next several months before acting. There is a possibility that it could cut rates at its June 18 meeting if it thinks the economy is slowing a lot.

While news headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a measure called the personal consumption expenditures deflator, not the CPI. The PCE deflator tends to run about half a percentage point below the CPI these days. The PCE deflator excluding food and energy rose at a 2.8% rate for the 12 months ending in February, compared with the core CPI’s 3.1% February number. But that is still too high for the Fed’s 2% target.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.