Kiplinger Inflation Outlook: Tariff Effects Not Showing Yet

last updated 13 May 2025

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Headline inflation remained muted in April at 2.3%. Core inflation (prices excluding food and energy) stayed at 2.8%. However, these are likely to be the lowest inflation numbers of the year. Tariff effects should filter in gradually as a number of businesses are able to first dig into existing inventories, or absorb tariff costs for the moment, before passing on price increases to their customers. The 25% duties on imported cars and auto parts will eventually raise both the average prices of new and used vehicles, and the cost of vehicle repair and insurance. The 30% tariff on China and 10% tariff on most other countries will affect prices of clothing, electronics and many other goods, though less than before the U.S.-China agreement to temporarily lower rates on each other’s goods.

Both shelter and medical services costs picked up in April, the main contributor to a rise in services costs back to their normal monthly average. Gasoline prices were unchanged, but natural gas service costs rose strongly for the third consecutive month. New-vehicle prices were unchanged, and used-vehicle prices declined 0.5%. This good news is unlikely to last, however, because of tariffs on car imports. The price of groceries declined 0.4%, on average, helped by a big drop in egg prices (down 12.7%). The avian flu had severely reduced flocks at egg-laying chicken farms, but farmers may have turned a corner. Prices are still 49.3% higher than a year ago, however. The cost of dining out continued to rise at a moderately strong pace and is up 3.9% over the past year.

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April’s moderate inflation will please the Federal Reserve but is unlikely to give the central bank enough reason to cut interest rates when it meets June 17-18. The Fed will want to see the effects of tariffs on inflation over the next several months before acting. That will include May’s inflation report, to be released on June 11, before the meeting.

While the headlines focus on the Consumer Price Index, note that the Fed’s goal of 2% inflation is based on a measure called the personal consumption expenditures deflator, not the CPI. The PCE deflator excluding food and energy rose at a 2.6% rate for the 12 months ending in March, compared with the core CPI’s 2.8% March number. But that is still too high for the Fed’s 2% target.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.