Econ Intel Brief - April 10, 2025
On today's CPI inflation print, and the possible effect of tariffs on inflation.
All,
In today’s EIB, please find:
Key Takeaways from Today’s CPI Report
Highlights for Media Hits
How Will The Tariffs Impact Inflation? (Part 1 - Fundamentals)
How Will The Tariffs Impact Inflation? (Part 2 - Measurement)
Preview of Upcoming Data Releases
This is a great day for messaging! Inflation is down, and stocks are up.
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Chris
Key Takeaways from Today’s CPI Report
At 8:30am, the BLS announced that in March 2025:
Headline CPI: -0.1% m/m (below Cleveland Fed nowcast of 0.03%).
Core CPI: 0.1% m/m (in line with Cleveland Fed nowcast of 0.07%).
As a result of the monthly decline in consumer prices:
The 12-month CPI inflation rate is 2.4% (down from 2.8% last month).
The 12-month core CPI inflation rate is 2.8% (lowest since March 2021).
Highlights for Media Hits
Today is a great day for messaging:
Yesterday, the S&P 500 gained 9.5% on news of a 90-day reciprocal tariff pause, marking the 9th largest one-day gain in its history.
The S&P 500 is nearly out of corrections territory (down 11% from peak).
Consumer prices are down this month, with notable declines in:
Energy: -2.4% (gasoline: -6.2%, fuel oil: -4.2%)
Used cars and trucks: -0.7%
Medical care commodities: -1.1%
Transportation services: -1.4%
Wages rose faster than prices in March, with real average hourly earnings up 0.3% and real average weekly earnings for production and non-supervisory employees up 0.8%.
How Will the Tariffs Impact Inflation? (Part 1 - Fundamentals)
The impact of tariffs on inflation depends on two key factors:
The extent to which tariffs reduce the budget deficit.
The extent to which tariffs reduce real GDP.
Estimates vary widely, but for illustration, consider two scenarios:
Pro-admin scenario: Tariffs reduce inflation due to minimal impact on economic growth and significant revenue generation.
Anti-admin scenario: Tariffs increase inflation due to severe negative impacts on growth and reduced revenue (Laffer curve).
The Tax Foundation estimates tariffs will raise about $2.2 trillion over 10 years but cut 0.8% from real GDP, suggesting a modest disinflationary effect of about 0.3% per year.
However, I believe these estimates may be overly optimistic. I suspect the hit to growth will be larger and revenue raised smaller, implying a modest inflationary effect. (I reserve making a quantitative forecast until the long-term policy is clearer.)
How Will The Tariffs Impact Inflation? (Part 2 - Measurement)
The effect of tariffs on inflation also depends on the inflation measure used. Here are three indexes:
Consumer Price Index (CPI): Includes prices for imported goods and services. Higher tariffs will tend to raise the CPI due to increased import prices and production costs. This will be partially blunted as consumer substitute into goods and services relatively less affected by tariff-led price increases.
Personal Consumption Expenditures (PCE) Price Index: Similar to CPI but better captures the substitution effect due to its use of quarterly data to track spending patterns. (CPI weights are based on an annual survey of consumers.)
Gross Domestic Product (GDP) Price Index: Includes prices for domestic production but may be less sensitive to tariffs since it does not directly account for import prices.
Preview of Upcoming Data Releases
The next EIB will cover the Fed’s industrial production report on 4/16 at 9:15am ET, which will provide more insight about whether the U.S. is in a recession.
BEA will release its “advance” estimate for Q1 real GDP growth on 4/30 at 8:30am ET. Current forecasts continue to vary widely.
Atlanta Fed GDPNow: -2.4%
Gold adjusted: -0.3%
New York Fed Staff Nowcast: 2.6%
(Forecasts for Q1 real GDP growth expressed at a seasonally adjusted annualized rate.)
Options markets are pricing a 80% chance that the Federal Reserve will hold interest rates steady at its next monetary policy meeting (May 6-7). Markets are pricing a 20% chance of a 0.25% cut. The current target range for overnight rates is 4.25% to 4.50%.