April CPI Report: Cooling Headline, But Core Inflation and Tariff Risks Complicate the Fed’s Path

Despite a reassuring 2.3% yoy headline inflation print in April, today's CPI report underscores an increasingly complex inflation landscape. While energy disinflation continues to suppress topline figures, core services inflation remains sticky, and the early effects of 2025 tariff measures are beginning to feed into retail prices. Markets initially welcomed the data, but a closer inspection reveals mounting risks that could delay the Fed’s policy pivot and rekindle long term inflation concerns.

Summary of April CPI Report

Metric	April 2025	March 2025
Headline CPI (YoY)	2.3%	2.4%
Headline CPI (MoM)	0.2%	-0.1%
Core CPI (YoY)	2.8%	2.8%
Core CPI (MoM)	0.3%	0.3%
Supercore Services (ex-shelter)	~3.1% (est.)	~3.2%

• Shelter: +0.3% MoM (accounts for >50% of monthly CPI increase)

• Food at Home: -0.4% (egg prices down 12.7%)

• Energy: -3.7% YoY (despite slight rebound in natural gas +3.7%)

• Motor Vehicle Insurance: +0.6%

• Medical Services: +0.5%

• Used Cars & Airfares: -0.5% and -2.8% respectively

1. Energy and Food Disinflation Remain Strong

2. Lower oil prices continue to drag headline inflation lower.

3. Broad based declines in food categories reinforce household purchasing power.
   

2. Services Inflation: Stubborn and Broad Based

• Shelter inflation remains sticky due to lagged leases and insurance.

• Medical, education, and auto-related services continue to climb.
  

3. Tariff Pass-Through Begins, But Mild For Now

• Recent research has shown Chinese, Canadian, and Mexican goods rose 1–1.2% after March tariff hikes.

• Bloomberg Economics and BLS data confirm modest increases in tariff-affected goods.

• The effective tariff rate on Chinese goods is appox. 30%, not 125% headline, due to exemptions and routing.
  

The Cleveland Fed’s nowcast pegs headline inflation between 2.2%–2.4% into May, with supercore services above 3%. The Fed’s preferred PCE gauge is likely to settle near 2.1%–2.3%, but labor-intensive service sectors are not cooling (yet). Markets are now pricing in just a 60.0% chance of a September rate cut, and the U.S. 10Yr Treasury yield surged to 4.49%, reflecting a reassessment of forward inflation risk and term premium. While the headline disinflation trend remains intact, the risk is now shifting from goods to services, tariffs, and fiscal policy spillovers.

🔺 Upside Inflation Risks

One of the most significant upside risks to inflation in the coming months stems from U.S. trade policy. While the headline tariff rate on Chinese goods now cut to 30%, the effective average rate after exemptions and routing adjustments is closer to 15%. Still, this lower effective rate is beginning to pass through to retail prices, and more of that impact is expected to materialize over the summer as inventories turn over and retailers adjust pricing strategies.

Another major factor is fiscal expansion. The Trump administration’s proposed fiscal agenda, including the extension of the Tax Cuts and Jobs Act (TCJA), the elimination of taxes on tips and Social Security, and the introduction of new senior-focused deductions, is projected to widen the federal deficit by approximately $4.3tril over the next decade. This level of deficit expansion could lift medium term inflation expectations, particularly if private sector capacity remains constrained.

Wage pressure also continues to underpin inflation in the service sector. Despite signs of softening in certain parts of the economy, labor markets remain tight in key services categories such as health care, transportation, and hospitality, driving persistent cost push inflation that is difficult to offset through monetary tightening alone.

Lastly, housing and insurance continue to contribute to sticky inflation. While some moderation in shelter costs has occurred at the margin, lease renewals and property insurance premiums remain elevated. These factors contribute to a slower pace of disinflation in core services, complicating the Federal Reserve’s timeline for rate cuts.

🔻 Downside Inflation Risks

On the other side of the ledger, energy prices remain a powerful disinflationary force. April CPI data showed a 3.7% year-over-year decline in the energy index, largely driven by lower gasoline and fuel oil prices. Should global oil markets remain soft, this will continue to place downward pressure on the headline CPI figure.

Additionally, signs of consumer fatigue are beginning to emerge. Real wage growth has stalled for lower-income households, and U.S. federal bankruptcy data shows an uptick in business and personal filings through Q125. This raises concerns about a potential demand side drag, which could contain future inflation, especially in discretionary goods and services.

Finally, tariff-related inflation may be more muted than feared. Broad exclusions have been carved out for high value consumer goods such as electronics, semiconductors, and automobiles. These exemptions reduce the pass-through risk to core inflation and may help explain the relatively modest price increases observed so far in tariff-exposed categories.

Bottomline

While headline inflation is falling, the underlying inflation process is sticky and uneven. The Fed’s dual mandate is facing asymmetrical pressures: a cooling economy but resilient inflation drivers in services and trade. Unless supercore inflation meaningfully breaks lower or unemployment rises sharply, the Fed is likely to remain on hold through Q3, with a first cut more probable in December.

For markets, this means:

• Limited upside for long-duration bonds unless growth cracks.

• Continued steepening of the yield curve.

• Cautious risk sentiment as fiscal and trade policy reintroduce medium-term inflation volatility.