Today's Consumer Price Index (CPI) report came with a surprise: consumer prices declined 0.1% in March, undercutting consensus expectations of a 0.1% gain. It's the first outright monthly decline since the COVID-19 lockdown era. Over the past year, CPI is now up 2.4%—a noticeable drop from February’s 2.8% reading and matching the lowest level seen since last September. (source: US Bureau of Labor Statistics)
What’s Behind the Drop?
Energy prices were the biggest drag, falling 2.4% in March—mainly driven by a 6.3% drop in gasoline prices. Meanwhile, food prices climbed a modest 0.4%, which is in line with historical norms.
Butthe bigger story may be the "core" CPI, which strips out the often volatile food and energy categories. Core prices rose just 0.1% in March—half of what economists expected. That pulls the year-over-year core CPI down to 2.8%, its lowest since 2021.
One of the largest contributors to core inflation continues to be housing rents, which were up 0.4% in March. Still, the pace of rent increases has cooled compared to previous years. Some Fed officials have suggested rent inflation is overstated due to how it's measured.
The “Supercore” Tells a Deeper Story
Federal Reserve Chair Jerome Powell has drawn attention to a narrower metric: the so-called “Supercore” inflation, which excludes food, energy, goods, and housing rents. It’s designed to isolate sticky service prices like travel, insurance, and medical costs. This Supercore measure rose 2.9% over the past year—but notably declined by 0.2% in March, suggesting some real cooling beneath the surface.
Notable monthly declines in this category include:
- Airline fares: -5.3%
- Hotels and motels: -4.3%
- Motor vehicle insurance: -0.8%
Earnings Show Positive Momentum
Real average hourly earnings—workers' pay adjusted for inflation—rose 0.3% in March and are up 1.4% year-over-year. Real weekly earnings have increased 0.8% over the same time period, indicating wage growth is finally outpacing inflation in real terms.
What Could This Mean for the Fed?
While inflation still exceeds the Fed's 2.0% target, progress is being made. With monetary policy known to work on a lag and money supply growth (M2) remaining subdued, the argument for easing interest rates in the coming months is gaining traction.
Elsewhere, the labor market remains resilient but shows signs of cooling. Initial jobless claims ticked up to 223,000 last week, while continuing claims declined to 1.850 million—consistent with slower, but still positive, job growth.
Key Takeaway
March’s inflation data suggests the Fed’s policy may finally be working as intended. If the cooling trend continues—especially in sticky service sectors—it’s reasonable to expect discussions about rate cuts to intensify in the months ahead. For consumers and investors alike, that could mean a more favorable environment for borrowing, investing, and economic stability heading into the second half of 2025.