The US dollar has declined due to March CPI being lower than anticipated, potentially allowing the Federal Reserve to reduce interest rates. Oil prices decreased by 4%, contributing to this trend.
CIBC reports that core non-housing services inflation fell sharply to 2.9%, marking the lowest level since 2021. However, the newly announced tariff increases on China may counteract this positive development.
Impact Of Cpi On The Market
Lower gasoline prices significantly impacted the CPI drop, alongside a 0.8% decline in car insurance rates. However, food inflation rose to 3.0% in March from 2.6%.
While rents and mortgage costs are declining, the drop in shelter costs was driven mainly by a 4.3% reduction in hotel prices. The situation raises concerns about travel demand.
CIBC states that the new tariffs will likely affect future data, as companies pass on costs to consumers. The uncertainty surrounding tariffs may impact sentiment and investment in the US, complicating the Fed’s decision-making regarding inflation risks and the weakening labour market.
Current market expectations estimate 102 basis points of easing this year, with a rate cut fully anticipated at the June 18 meeting.
Monetary Policy Challenges
What we’re seeing here is a situation where softer inflation data is giving the Federal Reserve more latitude. The lower-than-expected Consumer Price Index (CPI) for March, heavily influenced by a drop in fuel and travel-related costs, has pulled the dollar down and sparked talk of a potential adjustment in interest rates — downward, notably. This makes sense: when inflation eases and the economy gives off signs of slowing, central banks usually rethink their policy stance. Lower interest rates typically weaken a currency, hence the dollar’s reaction.
Car insurance costs falling by nearly 1% and fuel prices slipping have weighed heavily on the CPI. These categories tend to be volatile, but when they shift together, they press the headline figure meaningfully down. Hotel prices dropping by over 4% is telling on its own. That kind of pullback implies waning consumer spending in discretionary areas like travel — less demand for holidays, fewer business trips — and this may not resolve quickly.
Simultaneously though, some of that optimism has to be tempered. Food inflation ticking up indicates that pressure elsewhere remains. And while it’s encouraging to see non-housing services cooling — a category that’s been surprisingly sticky — trade policy is now re-entering the scene. The newly imposed tariffs against China may reverse some progress. If companies face sustained cost pressure, they’re going to pass that along to consumers, which would show up in future inflation readings. That 2.9% reading for core non-housing services won’t hold if these costs feed through.
Rents easing has helped calm shelter costs overall, but given that hotels skewed the data heavily this time, we shouldn’t assume rents are about to fall in a straight line. The property market moves more slowly than other items, and some of the longer-term leases will keep filtering through.
From our perspective, we must remain attentive to how rate cut expectations shift in response. Markets are presently pricing in over 1 percentage point of cuts over the year — with a full 25 basis point reduction anticipated at the mid-June policy meeting. That’s quite a strong forecast. If incoming data, particularly on employment or retail spending, challenges this expectation, it could unwind some of the current bets.
Moreover, the potential impact of tariffs is not fully baked into pricing yet. If firms begin to warn about cost increases or cut capital expenditure, that could narrow the path for easing. Likewise, consumer confidence surveys will be worth watching. Any faltering there could lead to policy adjustments that markets aren’t currently expecting.
We’re approaching a period where inflation data, labour trends, and global trade issues will all pull on monetary policy, often in opposite directions. For our purposes, positioning into the next few weeks means staying nimble. Expect renewed volatility. Instances of overshooting in rate expectations may offer opportunities to realign. Stay closely tuned to survey-based inflation forecasts and producer input costs — these are often the earliest indicators when tariff-related pressures start to filter through.
