Inflation Was Softer in April, but Tariff Impacts Still Loom

Key Takeaways

• The annual inflation rate cooled to 2.3% in April, a milder print than economists expected.
• The data shows little impact from President Donald Trump’s new tariffs, but US consumers will eventually face higher prices, even if tariffs are implemented at reduced levels.
• The Federal Reserve is expected to hold interest rates steady at its upcoming June meeting.

The annual inflation rate ticked down in April as the impact of Trump’s new tariffs remains muted—for now. Economists expect tariffs will eventually push consumer prices higher, though it will take some time for the effects to show up in the data.

The Bureau of Labor Statistics reported Tuesday that the Consumer Price Index increased 2.3% in April from year-ago levels compared with 2.4% in March. On a monthly basis, inflation rose to 0.2% compared with 0.1% in March, as businesses and consumers began to grapple with the potential impact of the Trump administration’s dramatic reshaping of US trade policy.

Core inflation, which excludes volatile food and energy prices, was up 2.8% on an annual basis and 0.2% on a monthly basis.

“Inflation isn’t yet registering a large tariff impact,” says Preston Caldwell, senior US economist at Morningstar. “Overall, the data points to an economy that, in the absence of looming tariff shocks, would be set to glide slowly back to the Fed’s 2% inflation target.”

Tariffs Likely to Push Consumer Prices Higher—Eventually

Trump initiated some new tariffs in February and March, but the largest and most comprehensive levies were announced at the beginning of April. Trump subsequently paused many of those new tariffs for 90 days to allow the United States and its trading partners to hash out new trade agreements. Over the weekend, the US and China agreed to reduce sky-high reciprocal tariffs to more moderate levels for another 90 days.

“If this revision sticks,” Caldwell says, “it will substantially curtail the economic disruption from tariffs.” Critically, the temporary agreement doesn’t mean tariff-related concerns can be relegated to the rearview mirror. “The revision would leave the average US tariff rate at about 18%, down from 25%,” Caldwell says. “That will still lead to significant increases in prices paid by US consumers.”

Those price effects could take weeks or months to come to fruition. “The flow-through of tariffs into consumer prices won’t be immediate,” Caldwell explains. “Prices don’t adjust overnight in response to any supply disruption.” He expects companies to increase prices gradually rather than all at once, and notes that the supply disruptions from the pandemic in 2020 put upward pressure on prices for years.

April CPI Report Key Stats

• CPI rose 0.2% for the month after falling 0.1% in March.
• Core CPI also rose 0.2% after falling 0.1% in March.
• CPI increased 2.3% year over year after increasing 2.4% the prior month.
• Core CPI rose 2.8% from year-ago levels after remaining unchanged in March.

Tariff Impact Muted—So Far

Energy prices were mixed in April’s CPI report, with utility gas prices and electricity prices rising while gasoline prices fell. Lower gas prices helped pull overall inflation dramatically lower last month.

Shelter prices rose 0.3% on a monthly basis, which according to the BLS accounted for more than half of the increase in the overall inflation rate. Over the longer term, however, Caldwell notes that housing inflation—the largest driver of inflation overall last year—has slowed to an annual rate of 4.1% versus 5.4% in 2024.

Caldwell says some very early impacts of tariffs are beginning to show up, and points to durable goods prices that have risen a cumulative 1% over the past two months. “On the other hand,” he adds, “new-vehicle prices have been about flat the past two months, despite many projections that the cost of the average vehicle will rise by 5% or more, owing to tariffs on imported autos and parts.”

When Will the Fed Cut Rates?

In the face of the tariffs, Federal Reserve officials could face a dilemma. The central bank targets 2% inflation as measured by the Personal Consumption Expenditures Price Index report. Inflation remains higher than that benchmark, and it could rise further as tariffs continue to bite. That would warrant tighter policy and higher interest rates. On the other hand, the economy is already slowing and could slow further thanks to tariffs. That would suggest a need for looser policy and lower interest rates.

Fed officials have left rates steady since last December, citing the need for more data and clarity on the path of the economy. Many market watchers expect them to extend that pause at their next meeting in June. “Today’s data doesn’t move the needle much for the Fed’s decision-making,” Caldwell says. He expects the first rate cut to come in July.

Bond market futures data shows 63% odds that the Fed holds steady in July and 34% odds of a quarter-point cut that month, according to data from the CME FedWatch tool. The odds of a September cut are higher at about 52%.

“The Fed is waiting for further months’ data to see how the tariff shock plays out in the economy,” Caldwell says. “The fact that tariff rates are still very much in flux also complicates the Fed’s decision-making.”