Fin-X Pulse 11th April 2025
- Brett Careedy
- 1 day ago
- 4 min read
Last night's inflation data provided a grim picture of spending and activity in the United States. At the same time, Congress took an important step towards cutting spending and making the 2017 tax cuts permanent, fuelling federal deficit concerns.
The American Consumer Price Index decreased by -0.1% on a seasonally adjusted basis in March, after rising +0.2% in February, the U.S. Bureau of Labor Statistics reported last night. The consensus expectation was for a +0.1% increase.
Over the last 12 months, the all items index increased +2.4% (+2.5% expected).
The index for energy fell -2.4% in March, as a -6.3% decline in the index for gasoline more than offset increases in the prices of electricity and natural gas. There were also significant monthly declines in the prices of used cars (-0.7%), motor insurance (-0.8%), medical care commodities (-1.1%), and air fares (-5.3%).
Shelter prices continued to rise by +0.2% and +4.0% yoy.
Core inflation ex-food and energy rose by +0.1%, also undershooting expectations of a +0.3% increase.
The annual increase in core CPI was +2.8%, down from +3.1% in February and below the +3.0% consensus forecast.
Perhaps most significantly, the Fed's "supercore" measure of services ex-shelter fell from +0.22% last month to -0.24% in March and to +2.86% yoy, down from +3.78% yoy. This measure is monitored because it more closely relates to wage pressures.
The White House also clarified yesterday that tariffs on Chinese imports would rise to +145%.
Last night, the House of Representatives narrowly passed a Republican budget framework with a vote of 216-214, paving the way for significant tax cuts and reductions in government spending, including Medicaid. The framework includes substantial tax reductions, aiming to make permanent the 2017 tax cuts for companies, small businesses and families, while also targeting $ -1.5 trillion in spending cuts over the next decade. This contrasts with the Senate's version, which proposed only $ -4 billion in cuts. Congress will now negotiate through the process of reconciliation.
S&P500 5,268 -3.5%, Nasdaq Comp. 16,387 -4.3%, S&P/ASX200 7,536 -2.3%,
US 2yr 3.83% -7bps, US 10yr 4.47% +14bps
US dollar (DXY) index 100.46 -2.4%, AUDUSD 0.6221 +1.1%, Gold US$/oz 3,190 +3.5%
Fin-X View
The CPI data will be quickly out of date. The 145% tariff impact is difficult to calculate but could add between +3% to +4%, to inflation based on the 17.7% of imports that came from China in 2024 and imports representing roughly 15% of GDP. However, falling energy, shelter, and other prices will likely offset some of the impact.
The plunge in the supercore measure indicates that consumers are paring back discretionary spending. This reconciles with Monday's surprise drop in consumer credit, and strongly suggests that the US is already entering recession. Higher prices will likely further impact the breadth of consumer spending and lead to rising unemployment.
PPI, which has more bearing on the Fed's targeted PCE inflation figure is expected to rise tonight. The market will also be paying close attention to the consumer inflation expectations in the University of Michigan survey which will influence the ability of the FOMC to cut rates.
Australian consumer inflation expectations have also risen from +3.6% yoy in March to +4.2% yoy, according to the Melbourne Institute, which might also constrain the RBA's ability to cut. The reasons for the rise in expectations are not entirely clear.
Last night's auction of $22 billion of 30yr US Treasuries at 4.813% (up from 4.623% in March) suggests that investors are wary of the inflationary and deficit implications of Republican policies.
Without more liquidity, or at least less quantitative tightening, the significant increase in Treasury issuance will likely weigh on equity prices.
However, investors are also responding to growth risks. Treasuries in maturities of less than 10yrs' tenor have seen yields fall in 2025, while longer-dated issues have seen yields rise. The 10yr yield is essentially unchanged, despite the sharp rise in recession risks.
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