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Inflation Data Shows Mild April Increase, But Tariff Effects Loom

Michael Frick

Michael Frick

— 8 min read
Inflation Data Shows Mild April Increase, But Tariff Effects Loom
Photo by Franki Chamaki / Unsplash

Introduction

The latest government data reveal that U.S. inflation cooled in April 2025, with the Consumer Price Index (CPI) rising by just 0.2% for the month and 2.3% over the past year-the smallest annual increase in four years. This moderation, driven by falling prices for essentials like groceries and gasoline, offers consumers a brief respite after years of elevated inflation. However, economists widely caution that this calm may be short-lived. With a new round of tariffs imposed earlier this year and only recently suspended for 90 days as part of a U.S.-China truce, the underlying pressures from higher import costs are expected to build in the coming months. As companies adjust to the evolving tariff landscape, the risk of renewed inflation looms, with significant implications for households, businesses, and policymakers.

1. April 2025 CPI: A Closer Look at the Numbers

Headline and Core Inflation

  • Headline CPI: The consumer price index rose 0.2% in April, following a 0.1% decline in March. On a year-over-year basis, inflation slowed to 2.3%, down from 2.4% in March and marking the lowest annual rate since February 2021[1][2][3][4][5][6][7].
  • Core CPI: Excluding food and energy, core inflation also increased by 0.2% for the month, maintaining a 2.8% annual rate-the lowest in four years, but still above the Federal Reserve’s 2% target[2:1][3:1][4:1][5:1][6:1][7:1].

Category Breakdown

  • Food: Grocery prices fell by 0.4% in April, with notable declines in eggs (down 12–13%), helping to offset persistent increases in other categories[1:1][6:2][7:2].
  • Energy: Gasoline prices dipped by 0.1% month-over-month and are down 12% year-over-year, reflecting lower oil prices amid recession fears[1:2][4:2][7:3].
  • Housing: Shelter costs, the largest component of the CPI, rose 0.3% in April and remain elevated at a 4% annual rate, accounting for more than half of the overall monthly increase[4:3][5:2].
  • Other Goods and Services: Used vehicle prices fell by 0.5%, apparel dropped by 0.2%, and airline fares decreased by 2.8%. However, medical care services, auto insurance, and repairs continued to climb[1:3][4:4][6:3].

Real Earnings

Despite the modest rise in prices, real average hourly earnings were unchanged for the month but are up 1.4% year-over-year, suggesting that wage growth is beginning to keep pace with inflation for many workers[4:5].

2. The Tariff Backdrop: Recent Policy Shifts and Their Timing

Trump Tariffs and the 2025 Trade War

Throughout early 2025, the Trump administration imposed a series of sweeping tariffs on imports from China, Canada, Mexico, and other countries. These included:

  • A 10% general tariff on nearly all imports
  • A 20% levy on all imports from China related to fentanyl
  • A 25% duty on imported cars and light trucks
  • Additional sector-specific tariffs on apparel, electronics, and more[2:2][8][9][10]

By April, the average effective U.S. tariff rate had climbed to 22.5%-the highest since 1909-raising widespread concern about the impact on consumer prices and economic growth[8:1][10:1].

The 90-Day U.S.-China Truce

In early May, the U.S. and China agreed to a 90-day suspension of most tariffs, reducing the U.S. tariff rate on Chinese imports from 145% to 30% and China’s tariffs on U.S. goods from 125% to 10%[9:1][3:2][11]. While this truce has temporarily eased some pressures, a baseline 10% tariff remains on nearly all imports, and the future beyond the 90-day window is highly uncertain[9:2][3:3][11:1].

3. Why Inflation Cooled in April

Key Drivers of Lower Inflation

  • Declining Goods Prices: Prices for many goods, including used vehicles, clothing, and electronics, either fell or rose only modestly in April, reflecting both easing supply chains and cautious consumer demand[1:4][4:6][6:4][7:4].
  • Food and Energy Relief: Lower fuel costs contributed to reduced transportation expenses for food, leading to falling grocery prices. The drop in gasoline and egg prices was especially significant[1:5][4:7][6:5][7:5].
  • Muted Tariff Pass-Through (So Far): While some categories-such as audio and photographic equipment-showed early signs of tariff-related price increases, the overall impact of tariffs on consumer prices remained subdued in April. Many businesses appear to have absorbed some of the initial cost increases or delayed passing them on to consumers[1:6][8:2][6:6][7:6].

Housing and Services

  • Shelter Costs: Housing inflation remains sticky, with shelter costs rising 0.3% in April and 4% year-over-year. This category continues to be the largest contributor to overall inflation, reflecting both high demand and limited supply in the rental and housing markets[4:8][5:3][6:7][7:7].
  • Services: Inflation for services has gradually moderated due to a softer labor market, slower wage growth, and the delayed effects of lower goods inflation[1:7][4:9][5:4][6:8][7:8].

4. The Looming Tariff Effect: What Comes Next?

Economists’ Warnings

Despite the current moderation, economists widely expect inflation to accelerate in the coming months as the effects of tariffs filter through the economy:

  • Tariffs as a Tax: Tariffs function as a tax on imports, raising costs for U.S. businesses that are typically passed on, at least in part, to consumers[1:8][2:3][8:3][9:3][3:4][5:5][6:9][7:9].
  • Short-Run Impact: The Yale Budget Lab estimates that the full suite of 2025 tariffs will raise consumer prices by 2.3% in the short run, costing the average U.S. household an additional $3,800 annually. Even the April 2nd tariffs alone are expected to increase prices by 1.3%, or $2,100 per household[8:4][10:2].
  • Disproportionate Effects: Tariffs are expected to hit clothing and textiles especially hard, with apparel prices projected to rise 17% under all tariffs. Food prices are also disproportionately affected, with a 1.6% increase from all tariffs[8:5][10:3].

Early Signs in April Data

Some categories already showed price increases likely linked to tariffs:

  • Audio equipment prices rose nearly 9% month-over-month
  • Photographic equipment increased by 2.2%
  • Furniture and computers also saw moderate price gains[1:9][8:6][6:10][7:10]

However, the overall impact was still limited, as the bulk of tariff-related price increases are expected to appear in the May and June CPI reports[1:10][2:4][8:7][6:11][7:11].

The 90-Day Window and Uncertainty

The temporary U.S.-China truce has delayed the worst-case inflation scenario, but uncertainty remains high:

  • If the truce is not extended or made permanent, tariffs could rebound sharply, reigniting inflation[9:4][3:5][11:2].
  • Even at the reduced 30% tariff rate, import costs remain elevated, and businesses are likely to pass more of these costs to consumers over time[9:5][3:6][11:3].
  • The Federal Reserve is expected to maintain a cautious, wait-and-see approach, monitoring inflation data closely before making any policy moves[3:7][5:6][7:12].

5. Broader Economic Implications

GDP and Growth Outlook

  • Slower Growth: The Yale Budget Lab projects that all 2025 tariffs will reduce U.S. real GDP growth by 0.7 percentage points in 2025 and leave the economy persistently 0.4% smaller in the long run-equivalent to $110 billion less in annual output[8:8][10:4].
  • Labor Market: The unemployment rate is forecast to rise by 0.4 percentage points by the end of 2025, with payroll employment 456,000 lower than it would be without the tariffs[10:5].
  • Sectoral Shifts: While manufacturing output may expand modestly due to tariff protections, other sectors-especially construction, agriculture, and mining-are expected to contract, reflecting the uneven impact of trade policy[10:6].

Household Impact

  • Purchasing Power: Tariffs erode household purchasing power, with average losses of $2,800 per household in the short run and $3,800 per year when all tariffs are included[8:9][10:7].
  • Income Distribution: Lower-income households are hit hardest, with annual losses of $1,700 from all tariffs, compared to $980 under the April 2nd tariffs alone[8:10][10:8].

Business and Market Response

  • Inventory Management: Many companies have been stockpiling goods during the tariff truce, leading to temporary surges in imports and shipping rates[9:6].
  • Planning Challenges: The ongoing uncertainty makes it difficult for businesses to plan, invest, or set prices, contributing to market volatility and cautious consumer sentiment[9:7][3:8][11:4].

6. Policy and Market Outlook

Federal Reserve Stance

  • The Federal Reserve has welcomed the recent cooling in inflation but remains wary of tariff-induced shocks. Chair Jerome Powell has signaled a “wait-and-see” approach, emphasizing the need for more data before adjusting interest rates[5:7].
  • The Fed’s 2% inflation target remains elusive, with core inflation stuck at 2.8% and headline inflation still above target[4:10][5:8][7:13].

Prospects for a Lasting Trade Deal

  • The 90-day U.S.-China truce offers hope for a more durable settlement, but analysts warn that clinching a long-term deal will be challenging[9:8][3:9][11:5].
  • If tariffs snap back after the truce expires, inflation could surge, consumer confidence could falter, and recession risks would rise again[9:9][3:10][11:6].
  • Conversely, a permanent reduction in tariffs could help contain inflation and support the job market, reducing the odds of a recession[9:10][3:11][11:7].

7. Conclusion

April’s inflation data provide a welcome, if temporary, reprieve for American consumers. The CPI’s mild increase and the lowest annual inflation rate in four years reflect the combined effects of easing supply chains, falling food and energy prices, and businesses’ initial reluctance to pass on higher import costs. Yet, the shadow of tariffs looms large. As the effects of 2025’s sweeping trade actions filter through the economy, economists expect inflation to accelerate in the coming months-especially if the temporary U.S.-China truce lapses without a permanent deal.

For households, the stakes are high: even modest increases in prices can erode purchasing power and strain budgets, particularly for lower-income families. For businesses, the uncertainty complicates planning and investment. And for policymakers, the challenge is to balance the goals of taming inflation, supporting growth, and navigating the unpredictable landscape of global trade.

The months ahead will be critical. The May and June CPI reports are likely to reveal the true impact of tariffs on consumer prices. Whether the U.S. can avoid a renewed inflation spike-and the potential economic fallout-will depend on the outcome of ongoing trade negotiations, the resilience of supply chains, and the ability of policymakers to respond swiftly to emerging risks.

Key Takeaways:

The inflation story for 2025 is far from over. The next chapters will be written by the interplay of trade policy, consumer behavior, and the global economic environment.

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