March CPI Data
U.S. Inflation Slows in March — But Tariff Storm Looms
The March 2025 U.S. CPI report came in cooler than expected, with Headline inflation (which includes all items like food and energy) actually fell by 0.1% from February, showing a rare monthly decline. Core inflation (which excludes volatile food and energy prices) rose by just 0.1%, indicating very modest price increases.
On a yearly basis:
Headline CPI (overall prices) increased 2.4% compared to March 2024, and Core CPI rose 2.8% year-over-year — both of which are slower than in recent months, showing that price growth is cooling down.
This marks the second straight month of downside inflation surprises, largely driven by falling energy prices, soft transportation costs, and a cooling in shelter and services prices.
However, the calm may be short-lived as tariffs on Chinese imports began in February, and their full inflationary impact has yet to surface. Tariffs on other countries are on a 90-day pause, but this still casts uncertainty over the path of inflation and interest rates.
Implications for U.S. Stocks:
Short-Term Positive for Equities:
Cooling inflation means lower pressure on the Fed to hike rates, which is typically supportive for equities, which could help the sentiment around the tariff impacts on outlook.
Bond yields may decline or stay steady, supporting equity valuations.
Medium-Term Risk from Tariffs:
Higher import costs could fuel inflation again in the coming months, eroding consumer purchasing power and corporate profit margins.
If inflation re-accelerates, the Fed may delay rate cuts, or even tighten policy again — a potential negative for stocks.
Investor sentiment may sour if trade tensions escalate, particularly in multinational, industrial, or retail sectors.
Potential Spillover to Canada:
Trade Sensitivity:
As a major U.S. trading partner, Canada is sensitive to U.S. demand. If U.S. consumers and businesses pull back due to inflation and uncertainty, it could slow Canadian exports, particularly in manufacturing and resources.
Tariff disruptions may shift some trade flows toward Canada (especially under USMCA rules), offering short-term opportunities for Canadian producers.
Interest Rate Implications:
The Bank of Canada will closely watch U.S. inflation trends. If U.S. inflation re-accelerates, it may influence Canadian inflation expectations or slow CAD appreciation, affecting BoC policy.
For now, cooling U.S. inflation gives both central banks room to stay on hold, which could support consumer confidence and equity markets in both countries.
Canadian Stocks:
Canadian equities — particularly export-oriented sectors like energy, materials, and auto parts — may benefit from a weaker USD/CAD if the Fed pivots to a dovish stance.
Canadian inflation-sensitive sectors, such as utilities, real estate, and consumer staples, could perform better if inflation remains controlled.
Outlook
The softer-than-expected U.S. CPI data for March 2025 supports a positive short-term market outlook, with equities likely to soften sentiment a bit from the anxiety caused by the tariffs. As a result investors and traders will have the expectations that the Federal Reserve will maintain a patient stance on interest rates. Bond markets may also rally on increased rate cut hopes, while the U.S. dollar could weaken slightly. However, medium-term risks remain, as the upcoming impact of new tariffs on Chinese goods could reignite inflation, dampen consumer sentiment, and complicate monetary policy. Canadian markets may see spillover benefits in the near term, though trade-related uncertainty and commodity price volatility could pose challenges ahead.
STA Research (StockTargetAdvisor.com) is a independent Investment Research company that specializes in stock forecasting and analysis with integrated AI, based on our platform stocktargetadvisor.com, EST 2007.
