U.S. Inflation Cools on a Monthly Basis, but Annual Core Pressures Remain Elevated

The U.S. Consumer Price Index (CPI) rose by a modest 0.1% in March 2025, falling short of market expectations of 0.3% and below the previous reading of 0.2%. This signals a potential moderation in short-term inflationary pressures.

Year-over-Year Inflation Remains Stubborn

Despite the monthly deceleration, the annual inflation rate came in at 2.8%, slightly below February’s 3.1%, but still above the Federal Reserve’s long-term target of 2%. Meanwhile, Core CPI — which excludes volatile food and energy prices — unexpectedly declined by 0.1% on a monthly basis, defying forecasts for a 0.1% increase. On an annual basis, Core CPI stands at 2.4%, down from 2.8% in the prior month.

Breakdown of the Data – Mixed Signals

• Core CPI (MoM): The rare monthly decline points to weakening price pressures in services and durable goods.
• Core CPI (YoY): Gradually easing, but still far from the Fed’s comfort zone.
• Headline inflation: While clearly trending downward from its 2022 highs, inflation remains uncomfortably high by historical standards.

Historical Comparison – Is Inflation Truly Under Control?

Compared to recent years, inflation is on a downward trajectory. However, current levels between 2.4% and 2.8% remain elevated relative to the pre-pandemic decade (2010–2020), which was marked by price stability. This raises the possibility that the 2% inflation target may no longer be realistic in the current macroeconomic regime.

Updated Forecasts – What Analysts Are Saying

Major financial institutions like Goldman Sachs and JP Morgan have revised their projections, now anticipating the first Fed rate cut in July, contingent upon further cooling in inflation. A Reuters survey indicates that 60% of economists expect a total reduction of 50 basis points by the end of 2025.

Geopolitical and Commodity Market Impacts

The drop in energy prices played a key role in the headline CPI moderation. However, geopolitical instability in the Red Sea region and continued tensions in Ukraine may exert renewed upward pressure on oil and gas prices. Any external shock in the commodities market could derail the current disinflationary path.

Risks Ahead – What Could Go Wrong?

Despite encouraging data, significant risks remain:

• The tight labor market continues to drive wage growth.
• Sticky inflation persists in certain service categories.
• An expansionary fiscal policy may slow the disinflation process.

Together, these factors could keep core inflation elevated and complicate the Fed’s path toward policy easing.

Implications for the Fed and Markets

While the monthly data suggests disinflation, the Fed is unlikely to declare victory prematurely. The persistent annual core inflation reinforces the case for maintaining a restrictive monetary stance, at least through mid-year.

The divergence between monthly easing and annual stickiness illustrates the complexity of the inflation narrative — short-term relief does not necessarily indicate long-term resolution.

Looking Ahead

Markets responded cautiously. While equities gained modestly — particularly in interest-rate-sensitive sectors like tech and real estate — investors are awaiting confirmation from future inflation reports. The next PCE index release and labor market data will be critical in shaping the Fed’s decisions for the second half of 2025.