Core CPI was much lower than expected in March, largely because of deterioration in travel-related costs. However, mortgage rates won’t drop much today because tariffs are still very high and will boost inflation in months to come.
Core inflation was just 0.06% in March, much lower than the 0.24% expected, because of significant deflation in travel-related categories. Overall inflation (which adds the volatile food and energy categories) was actually negative because of a large drop in energy prices. Within core inflation categories, airfares were down 5.3% from a month ago and hotel prices were down 4.3%. Shelter seemingly cooled to 0.2% from a month ago, but it was actually all in “lodging away from home.” Rent of primary residence actually stayed flat at 0.3% month over month and owners equivalent rent (what homeowners would need to pay to rent their home) actually ticked up to 0.4% month over month from 0.3% previously. The overall picture indicates that foreign travel demand has really tanked, consistent with the narrative from Delta airlines on their recent earnings call.
The March report does not show tariff-related impacts, but we still expect higher inflation in coming months. That’s because yesterday’s 90-day pause on most reciprocal tariffs still leaves the average tariff rate higher than it was on April 2, when President Trump announced the tariffs. In the last few days, the US has increased tariffs on China so much that they overwhelm the 90-day delay on reciprocal tariffs for everyone else, because China is the US’ third largest trading partner. Furthermore, the other countries still face tariffs of 10%, which would have been a shockingly high number before April 2. Not to mention the previously implemented tariffs on Canada and Mexico on non-USMCA covered goods, automobiles and car parts, steel and aluminum, and the sector-specific tariffs to come (e.g. pharmaceuticals). As a result, the trade-weighted average tariff rate still exceeds 20% and is still the highest in about a century. Of course, yesterday’s pause likely indicates that the 125% tariffs on China will gradually be walked back, but that is currently uncertain.
With the tariff story still playing out, the Fed will be cautious about cutting and mortgage rates are unlikely to see much relief from today’s inflation news. In addition, any continued volatility in bond markets will keep mortgage spreads high, meaning mortgage rates stay higher relative to the 10 year treasury yields they normally follow.
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