March 2025 year-over-year inflation (CPI) falls to 2.39%

As a reminder, Bancreek publishes two visualizations that can help you explore CPI-U in granular detail. Both of these visualizations have now been updated through March and are embedded below:

This post hopefully will further assist in your analysis of the moving parts underlying this month’s CPI report. Its goal is not to provide a comprehensive analysis of the nearly 180 items we track (that’s what the visualizations are for), but rather just to point to the most meaningful changes from one month to the next.

To perform this analysis, we track a measure we call “inflation impact,” which we calculate by multiplying each item’s YoY inflation by its weight in the prior year period. You can think of this as “weighted inflation” as opposed to the “unweighted inflation” that is more commonly reported by the media. Each month we take the weighted inflation of each item we track in CPI-U and then sum them up to overall CPI-U. Then we compare these weighted inflation numbers from one month to the next to see what drove the sequential increase or decrease. In this way, we can precisely identify the most significant drivers in the change in YoY CPI-U from one CPI report to the next.  

The items that changed the most this month conveniently explain the entire change in headline inflation (again)

As a reminder, our primary goal with our analysis each month is to explain the main drivers responsible for the change in  CPI report from the prior month to the current month. To that end, we have 43 basis points of lower YoY inflation in March when compared to February to explain. The following chart shows 12 items whose weighted inflation impact on US Consumer Price Index changed by +/-1 basis point. Conveniently for all of us, when we sum up the inflation impact of these 12 items we get -44 bps. In other words, all the small changes in weighted inflation on the other 165+ items netted out to just one basis point.

Source: Bancreek Capital Advisors, LLC

Given how cooperative the data was this month, we can just use the above chart as a table of contents of sorts to walk you through a few of the main drivers of the decline in CPI this month.

Gasoline prices continue to ease

Let's start with the most favorable development this month, which was once again, gasoline price deflation. According to the BLS, gasoline prices dropped -9.8% YoY in February. As we've written, the BLS' numbers are almost perfectly correlated with Daily National Average Gasoline Prices (Regular Unleaded) as measured and reported daily by AAA. So, going into last week's print AAA already had told us prices were down -9.9% YoY. As such, last Thursday's -9.8% print shouldn't have come as a surprise to anyone. If this almost perfect correction between these two series is news to you and you are looking for a more complete discussion on the relationship, check out this post.

This almost perfect correlation between Gasoline in CPI and AAA's reported prices unlocks our ability (and yours) to look into the future to see what Gasoline's impact could be on CPI next month. So, let's go ahead and do that now.

Through 4/13/25, the average price of gasoline in April was $3.23 per gallon. That's up from $3.11 per gallon in March. But, what we really care about here is the YoY comparison. Note that we usually see some seasonal uplift in gasoline prices going into the spring. As shown in the chart below, this dynamic played out last year with gasoline prices peaking at nearly $3.70 per gallon in April. Towards the end of March and into the very early days of April it looked like the seasonal uplift in gasoline prices had finally arrived... until "Liberation Day" spurred a sell off in the oil complex. Given the economic uncertainty, it's now looking more likely that gasoline prices could remain under wraps at least through April. For modeling purposes, let's say gasoline prices keep their $3.23 per gallon average this month. If this happens, we would end up with -11.0% deflation in this item in April. If we apply Gasoline's weight to this, we'll lose another seven basis points of headline inflation in the April CPI report. While this is not nearly as large of an incremental impact as we saw from February to March, it is still notable deflationary pressure in the midst of a sea of inflationary worries.

Source: Bancreek Capital Advisors, LLC

Motor vehicle insurance deflation steals the show in March

The big surprise of this month's CPI report (in our view) was the -0.63% MoM print we got in Motor vehicle insurance. As shown in the chart below, not only was this the largest deflationary print we have received for this item since 2020, but it came completely out of left field, as the prior two months we saw sizable MoM inflationary prints for this item of 0.94% and 2.21%.

Source: Bancreek Capital Advisors, LLC

We just can't overstate how critical this single item is to Consumer Price Index going forward. In February, Motor vehicle insurance's weighted inflation impact was 31 basis points. One month later, this dropped to 21 basis points. In other words, this single deflationary print chopped 10 basis points off CPI in March. Arguably this one item explains the majority of the gap between the actual CPI print and consensus' expectations. This is what happens when a very sizable item (2.91% weight) experiences extreme measurement volatility.

If we look forward, it's not an exaggeration to say that Motor vehicle insurance could be the single largest counter balance to tariff driven inflation going forward. What if this month's print was an anomaly and Motor vehicle insurance flips back to, say, ~1.0% MoM inflation in April? If this happens, disinflation on this items stalls, leaving tariff-driven inflation unchecked. But, what we continue to get deflationary prints in Motor vehicle insurance through the spring? If we assume the next few months come in at, say, -0.50% MoM, we could lose another 10 basis points from headline inflation in the coming months.

Turbulence in discretionary travel spending?

Two other items that pulled inflation down in March were Other lodging away from home including hotels and motels (-3.7% YoY) and Airline fares (-5.2% YoY). Below are historical YoY inflation trend charts for these two items, both of which are starting to look a bit ominous.

Source: Bancreek Capital Advisors, LLC

Source: Bancreek Capital Advisors, LLC

Last month we highlighted that in 2024 airfare inflation rose into the spring, which now has the effect of providing easy "comps" for airfare inflation in 2025. This is especially notable now that airfare is deflating on a month-over-month basis, exacerbating the year-over-year deflation for this item. It gets confusing trying to explain the impact of cycling prior year "comps" using words, so maybe this picture will help illustrate what's going on.

Source: Bancreek Capital Advisors, LLC

As shown above, in 2024 the airfare CPI report index value surged all the way to ~281 in May. Meanwhile, in March 2025, it was just under 253 and trending down. Let's for argument sake assume that it flat lines at 253 the next two months. This would result in -10% deflation in this item in May, which when we apply this item's weight, would shave another four basis points off headline CPI. Four basis points may not seem like much, but it's actually a substantial amount of deflation for an item that has a weight of less than 1%. Moreover, this analysis assumes that airfare deflation comes to an end, which given the messaging coming from the major airline carriers, may be an overly conservative assumption.

Interestingly, Other lodging away from home including hotels and motels ("Hotels") has a similar set up from a seasonality perspective.

Source: Bancreek Capital Advisors, LLC

If we assume this series also flat lines for the next two months, we're looking at -6.3% deflation for Hotels in May 2025. On a weighted basis, this would shave another three basis points off headline CPI.

Shelter inflation continues to moderate

No post on Consumer Price Index would be complete without discussing Shelter, which due to its immense weight is the dominant factor driving the CPI measure. Once again, we received good news from Shelter this month, with both Owners' equivalent rent of residences ("OER") and Rental of primary residences ("Rent") coming in around ~30 basis points of sequential MoM inflation.

Source: Bancreek Capital Advisors, LLC

With these two items weighing in at over 1/3 of headline CPI, it's critical that they keep delivering muted sequential inflation to help offset any tariff-driven inflation that's very likely to hit other items in the coming months.

The good news is that March 2025 marks the fifth consecutive month that OER and Rents have printed sequential inflation in the ballpark of ~30 bps per month. So, it does very much appear that these critical items have settled into this range.

The bad news is that most of the juice has been squeezed from these two Shelter items at this stage. Consider that over the past six months the combined weighted inflation impact of these two items has dropped from 1.70% to 1.48%. In other words, disinflation in Shelter has helped ease CPI by 21 basis points. When we model a 30 basis point run rate going forward, we only see another five or so basis points of easing in Shelter, which for items this large is not all that impressive. Nonetheless, it's critical that sequential Shelter inflation stays under control. If for some reason it spikes again (which wouldn't make logical sense due to tariffs) that could have an even more damaging impact to CPI than tariffs given how sizable Shelter's weight is within CPI.

Removing emotion from inflation analysis

With all the uncertainty injected into the market thanks to escalating trade wars and isolationism to an extent that none of us have seen, it's hard to remove emotion from our assessment of macroeconomic indicators. The tariff battle between the U.S. and China is especially troubling when it comes to our "feelings" about inflation, as we can't help but wonder how many random things we buy each day come from China and will soon be subjected to steep price increases.

But it's important to understand that CPI is not a proxy for our feelings about inflation. Rather we find it helpful to just look at CPI as a mathematical formula that is no more than the weighted average of 180 or so mutually exclusive items. As hopefully we have made clear throughout all our coverage of CPI, the weights the BLS applies to the items that underlie CPI tend are heavily biased to items like Shelter and services such as Motor vehicle insurance. These are items that don't have a direct tie to Trump's trade war. They are also items that just happen to be acting as disinflationary forces right now as well. Meanwhile, other highly volatile items such as gasoline, airfare, and hotels are much more sensitive to demand destruction, and can also act as disinflationary (or even deflationary) forces as consumers slow spending.

Put it all together and the story becomes considerably more complex than the media will lead you to believe. We can't simply assume that tariffs equal higher CPI readings, especially in the near term as other disinflationary and deflationary forces play out.

We'll offer one other scenario just to help hammer this concept home. As of March 2025, YoY inflation on the Food and beverage category was 2.9%, up from a low of 2.1% in October 2024. The entire category carries a weight of 14.3% within the CPI measure. Let's say inflation on this category doubles to 5.8% thanks to tariffs, which would be the highest this category has gone since 2005 (besides COVID when it reached 10%). If this happened, it would drive headline CPI up by 41 basis points, which is considerable. But if you add up all of the deflationary/disinflationary forces we have discussed in this post, you would get around -30 basis points of potential easing in the coming months, offsetting most of this inflationary surge.

Please note that we are not claiming that we won't experience inflation due to tariffs. Rather, the entire purpose of this post is to remind us that it's helpful to remove emotion from our analysis of CPI reporting to provide the clearest picture of where this measure could go in the coming months. Hopefully this post and our interactive data visualizations help you do exactly this, and provide you an edge in how to think about this critical inflation measure in these uncertain and volatile times.