US Inflation Moderation: Calm before a Storm?

library(tidyverse)
library(dplyr)
library(ggrepel)
library(scales)
library(dplyr)
library(tidyr)
library(tidyquant)
library(scales)
library(tidyverse)
library(gganimate)
mypalette<- c("#22457C",
              "#4A77B3",
              "#72A9EA",
              "#55A630",
              "#80B918",
              "#E9B310",
              "#F2D388",
              "#2E5E24")

# Get CPI data from FRED
cpi_data <- tq_get("CPIAUCSL", get = "economic.data", from = "2017-01-01", to = "2025-04-01")

# Calculate Year-over-Year (YOY) Inflation
cpi_data <- cpi_data %>%
  mutate(
    lag_12 = lag(price, 12),
    yoy_inflation = ((price / lag_12) - 1) * 100
  ) %>%
  filter(!is.na(yoy_inflation))

# Get the latest YOY inflation value and date for annotation
latest_value <- cpi_data %>%
  slice_tail(n = 1) %>%
  pull(yoy_inflation)

latest_date <- cpi_data %>%
  slice_tail(n = 1) %>%
  pull(date)

# Create the plot with annotation
ggplot(cpi_data, aes(x = date, y = yoy_inflation)) +
  geom_line(size=1.2, color = mypalette[3]) +
  geom_point(data = tail(cpi_data, 1), color = "blue", size = 3) + # Add a point for emphasis
  geom_text(
    aes(label = paste0(round(yoy_inflation, 1), "%")),
    data = tail(cpi_data, 1),
    nudge_x = 20, # Adjust horizontal position of text
    nudge_y = 0.5, # Adjust vertical position of text
    hjust = 0,    # Adjust horizontal justification of text
    vjust = 0.5   # Adjust vertical justification of text
  ) +
  labs(
    title = "US Year-over-Year Inflation",
    x = "",
    y = "Year-over-Year Inflation (%)",
    caption = "Source: BLS"
  ) +
  scale_x_date(date_breaks = "6 months", date_labels = "%m/%y") +
  theme_minimal() +
  theme(axis.text = element_text(color = "grey20", size = rel(0.9)),
    plot.title = element_text(size = rel(1.4), color = "black", face = "bold", hjust = 0.5),
        plot.subtitle = element_text(size = rel(0.8), color = "black", hjust = 0.5),
    plot.caption = element_text(size = rel(0.7), color = "grey30", hjust = 0),
    panel.background = element_rect(fill = "#f2f7f7",
                                colour = "#f2f7f7",
                                size = 0, linetype = "solid"),
    panel.border = element_blank(),
    plot.background = element_rect(fill = "#f2f7f7", color = NA),
    panel.grid.major.x = element_blank(), # Remove vertical grid lines
    panel.grid.minor = element_blank())+
    transition_reveal(date)+
  shadow_wake(wake_length = 0.3) 

anim_save(filename = "cpi_animate.gif")

April’s Inflation Insights

The US Bureau of Labor Statistics released its monthly data on the Consumer Price Index (CPI) on 13 May 2025, revealing that inflation in the U.S. dropped to 2.3% in April, marking the lowest annual rate since February 2021. This figure was slightly below expectations, indicating a potential easing of inflationary pressures. Additionally, the month-on-month price changes showed a modest increase of 0.2%, in contrast to March’s slight decline of 0.1%. Excluding the more volatile categories of food and energy prices, the core CPI recorded an annual change of 2.8%, maintaining a monthly increase of 0.2%—aligning with earlier forecasts.

Tariffs and Economic Uncertainty

While recent moderation in inflation appears favorable, it may not reflect the common economic reality. Notably, this April inflation reading does not yet reflect the true cost of tariffs, as businesses anticipated price hikes by increasing their inventories to absorb initial cost increases. As these inventories are used up, the inflationary consequences of the tariffs are likely to become more evident. Fortunately, a temporary 90-day pause in tariff increases between the U.S. and China could provide some relief by lowering import costs and avoiding supply chain disruptions.

Trade Policy and Economic Indicators

The initial GDP estimate for the first quarter, showing a -0.3% annualized contraction, further illustrated the complex relationship between trade policy and economic performance. This downturn was primarily driven by a sharp increase in imports as businesses built up their inventories in anticipation of impending tariff changes. While government spending fell by -1.5%, consumer spending and business investment remained positive, with companies notably increasing equipment investments amidst economic uncertainty.

Meanwhile, the U.S. Federal Reserve has adopted a cautious approach, opting to keep the federal funds rate steady for its third consecutive meeting, ranging from 4.25% to 4.50%. Chair Jerome Powell’s statements reflected an acknowledgment of increased uncertainty surrounding economic projections, emphasizing that the Fed will continue to evaluate the long-term impacts of tariff policies before proceeding with any adjustments to monetary policy. Powell characterized the economic growth as solid, but cautioned about the potential ramifications of looming higher inflation, elevated unemployment rates, and overall sluggish growth spurred by tariffs.

Vigilance

Although recent efforts by the Administration toward de-escalation and negotiation may be a positive development, there is still considerable uncertainty regarding the long-term trajectory of the US’ trade policy. Assuming that these tensions continue to ease, the threat of a significant downturn may be averted. The announced 90-day pause in the US-China tariff dispute, involving reciprocal tariff reductions ¹ could be interpreted as a step away from a potential global economic slowdown. However, it is crucial to recognize that these are provisional trade arrangements, not legally binding agreements Another potential concern from this ongoing shift in trade policy is the role of US Treasures and dollar as safe-haven assets as well as the potential for a fundamental shift of global capital flows. As central bankers, we must shift our analysis beyond immediate events to examine the underlying structural dynamics that will ultimately determine any potential impact of these developments on our economies, through tourism and investments as well as our reserves through and fixed-income valuations.

In conclusion, the dynamics of tariffs, consumer sentiment, and investment patterns are not clear-cut at this time in light of ongoing negotiations and associated uncertainty from the US administration. While April’s inflation data shows that there has been some cooling, economists remain vigilant about the effects of ongoing trade uncertainties and potential recession risks. Businesses and policymakers should continue to be vigilant and cautious as the uncertainties from trade policies continue to reshape the U.S. economic landscape.

Footnotes

1. US on Chinese imports from 145% to 30%, and China on US imports from 125% to 10%).