Truflation March Inflation Report & BLS CPI Prediction

Economic Overview

Economic growth slowed more than expected in the final quarter of 2025. GDP rose just 0.7% in Q4, down from the initial estimate of 1.4% and a sharp deceleration from the 4.4% expansion in Q3. The slowdown was largely driven by a prolonged government shutdown, which significantly reduced public spending. The downward revision also reflected weaker consumer spending (revised down by 0.4 percentage points), along with softer government expenditure and exports.

Looking ahead, the Federal Reserve Bank of Atlanta's GDPNow estimate for Q1 stood at 1.3% as of April 7, down from 1.6% the prior week. This moderation likely reflects a combination of geopolitical tensions, changing labor market momentum and persistent inflationary pressures. While some factors, such as winter weather and trade distortions, are temporary, they have contributed to a broader downgrade in near term growth expectations. That said, the economy appears to be transitioning from a strong to a more sustainable pace, rather than signaling an imminent recession.

Retail sales data, however, paints a more resilient picture of consumer demand. Sales rose 0.6% month over month in February, rebounding from a revised 0.1% decline in January, and marking a 3.7% year over year increase. The recovery was broad-based, led by stronger auto sales, apparel, and online retail activity. A key driver was the influx of tax refunds, which boosted disposable income, particularly among lower-income households and supported spending.

Trade data for January was relatively weak, as importers delayed activity pending the Supreme Court decision on tariffs. Following the ruling and mandating refunds, import activity was expected to rebound, and was already visible in February data and likely to strengthen further in March, given typical shipping and clearance timelines.

Exhibit 1 - Monthly Trade Balances

Source: US Department of the Treasury

The labor market showed signs of improvement in March, with nonfarm payrolls increasing by 178,000, up from 133,000 in the previous month. While encouraging, the broader trend remains one of subdued growth, with hiring activity relatively soft since mid 2024. Job gains were concentrated in healthcare, construction, and transportation, while declines were observed in federal government employment and financial services.

The unemployment rate edged lower to 4.3%, though this was largely driven by a decline in labor force participation. The employment-to-population ratio fell to 61.9%, its lowest level since November 2021. Broader measures of labor underutilization, including discouraged workers and those employed part-time for economic reasons, have risen to around 8%, indicating underlying softness.

Pay growth continues its long-term gradual cooling, with pay increasing 4.6% year over year according to Truflation. The deceleration has been driven primarily by reduced wage gains among job switchers, reflecting weaker labor market dynamism and fewer job opportunities.

Exhibit 2 – Savings Rate & Truflation Pay Growth

Source: BEA  & Truflation Wage Tracker

The evolving labor market dynamics, combined with estimates from the Federal Reserve Bank of St. Louis suggesting that payroll growth as low as 15,000 could stabilize unemployment, place the Federal Reserve in a delicate position. Policymakers are likely to remain data dependent and patient, though some have begun advocating for rate cuts to pre-empt further labor market weakening.

Despite this, inflation remains above target and rising energy prices, amid ongoing geopolitical tensions, continue to pose upside risks. Market expectations reflect this uncertainty, with the Federal Open Market Committee widely expected to hold rates steady. According to CME FedWatch, there is virtually no probability of a rate change at the April meeting and a 77.5% likelihood that rates will remain unchanged through year-end.

Household Debt - Growing signs of financial stress

Household debt reached a record $18.8 trillion by the end of 2025, driven by increases in mortgage, credit card, and auto loan balances. While aggregate debt levels are elevated, the average household carries approximately $145,000 in total debt, the majority of which is tied to mortgages. Non-mortgage debt averages around $42,000 per household. Although rising debt levels can support economic activity, they also signal increased vulnerability to economic shocks and may constrain future consumer spending.

This expansion in debt has been accompanied by growing signs of financial stress. Approximately 4.8% of outstanding debt is now in some stage of delinquency, up from 3.6% a year earlier and the highest level since Q4 2019, albeit under very different economic conditions.

Delinquency data shows a clear upward trend across categories, particularly in more severe stages. Early-stage delinquencies (30–60 days) have risen gradually, but more concerning is the increase in 90+ day delinquencies and seriously derogatory balances, which typically signal deeper financial strain. 

Exhibit 3 – HH  Balance by Delinquency Status

Source: New York Federal Reserve Bank

These trends are especially pronounced in student loans and credit card debt, where delinquencies have risen sharply and are now approaching levels last seen in the aftermath of the Global Financial Crisis.

While part of this increase reflects a normalization from the unusually low delinquency rates observed during the pandemic, when fiscal support and forbearance programs were widespread, the pace of deterioration is notable. Higher interest rates, combined with looser lending conditions in the post 2021 period, are placing increasing pressure on household finances, particularly among lower-income consumers.

Overall, while the labor market remains relatively resilient, the rise in delinquencies suggests that a growing segment of households is under financial strain. This marks a potential turning point in consumer balance sheets and warrants close monitoring, particularly if labor market conditions soften or borrowing costs remain elevated.

Exhibit 4 – Household Debt & Credit Report: Percent of Balance 90+ Days Delinquent by Loan Type

Source: New York Federal Reserve Bank

Inflation Status - Gas, Gas, and more Gas

The dominant story this month is oil, oil, and more oil. The price of WTI crude surged from $71.99 at the start of the month to $101.38 by the end of March, marking the first time since 2022 that prices have breached the $100 per barrel threshold. This sharp move has flowed directly into gasoline prices, which surpassed $4.00 per gallon nationally on March 30, up from $3.06 at the beginning of the month, according to the Truflation U.S. CPI Gas Index.

As Truflation previously highlighted, the price shock may not yet be over. Disruptions originating in the Strait of Hormuz are only now beginning to manifest in reduced seaborne supply. This lagged impact, that is, moving through global energy supply chains, continues to widen. Unlike the Russia-Ukraine War, where Russian exports remained more resilient than expected, current supply constraints appear more severe. As a result, coordinated global efforts to release strategic reserves are underway. However, even if the Strait fully reopens, restoring normal supply flows could take months, suggesting that elevated prices may persist.

As part of the global coordinated efforts, the U.S. Strategic Petroleum Reserve (SPR) inventories, as of the week ending March 27, declined by 0.4 million barrels to 415.1 million barrels; the first notable drawdown since July 2025. In response to escalating tensions, the current administration has pledged to release 172 million barrels as part of a broader global initiative.

This planned release, expected over a 120-day period, is designed to stabilize markets. However, if fully executed, it would reduce SPR levels to approximately 240–250 million barrels, potentially the lowest on record, raising concerns about reduced resilience to future shocks. Encouragingly, there has been a recent uptick in shipping traffic through the Strait, which may help ease supply pressures if sustained.

The downstream impact is already evident. Gasoline prices surged 22.9% month over month in March 2026, the largest increase on record. For context, the previous peak was 19.7% in March 2022. This sharp acceleration will materially impact headline CPI in March, as well as April.

Exhibit 5 – Truflation Gas  vs WTI Crude Oil Prices

What does this imply for Truflation’s forecast of the BLS CPI headline inflation for March? Truflation is projected at 3.3% year on year, slightly below the market consensus of 3.4%, which itself spans a relatively wide forecast range of 3.0% to 3.8%.

Beyond the impact of gasoline, the acceleration in inflation is being driven by a combination of healthcare, education, and apparel, with gasoline remaining the most prominent contributor. This reflects broad-based price pressures across both goods and services, including the core components of inflation.

Truflation Goods prices are rising at 1.74% month on month, primarily due to ongoing supply chain bottlenecks, higher production costs (notably wages and energy), and the repricing of inventories to incorporate earlier tariff increases, particularly within apparel. These dynamics point to a clear cost-push inflation environment, driven by second-round effects from energy and trade-related pressures.

These trends are further reinforced by the ISM Manufacturing Prices Index, which surged to 78.3 in March 2026, its highest level since June 2022 (78.5). This marks a sharp 19.3-point increase in just two months from 59 in January, the largest two-month rise since April 2016. The move reflects the transmission of the Middle East conflict into the real economy: initially priced in by commodity markets, and is now feeding through into manufacturing input costs.

In the historical context, however, the current level is not without precedent. During the 2018 tariff escalation period, the index reached as high as 79.5. While elevated, current readings are therefore consistent with prior supply-driven price shocks, rather than signaling a fundamentally new inflation regime. Looking ahead, manufacturing price pressures are likely to remain elevated in the near term, particularly while energy markets remain disrupted. That said, as supply chains gradually normalize, these pressures could ease meaningfully over the coming months.

Exhibit 6 – Truflation Year on Year Key Inflationary Metrics: Goods vs Services vs Core

Truflation Service prices increased 1.37% month on month, driven primarily by persistently elevated labor costs. While wage pressures have begun to moderate, they continue to pass through relatively quickly into consumer prices. In addition, recent changes in government legislation, particularly affecting healthcare and education, have contributed to the upward pressure. Excluding these policy-driven effects, underlying services inflation shows clearer signs of moderation.

This trend is reflected in the ISM Services Prices Index, which declined to 54.0 in March 2026, down from 56.1 in February, indicating a slowdown in services sector price momentum amid weaker economic activity linked to the Middle East conflict. At the same time, the broader price index rose, highlighting the continued impact of higher labor and energy costs feeding into services.

Exhibit 7 – Truflation Year on Year Category Inflation Drivers

If historical patterns, particularly those observed during the 2018 tariff period, hold, a gradual easing in services price pressures is likely. However, the pace of normalization may be slow, especially given the ongoing influence of wage dynamics.

In March, the largest upward contributors to inflation were health care, education, clothing, and gasoline, while utilities, communications, alcohol & tobacco, and housing (to a lesser degree) exerted the greatest downward pressures. This composition reflects evolving consumer behavior alongside persistent supply-side adjustments and rising energy costs.

Sector-Specific Inflation Drivers

• Health Care: +6.8% MoM | +11.6% YoY. Healthcare costs and insurance premiums are rising sharply, driven in part by the expiration of enhanced Affordable Care Act (ACA) tax credits at the end of 2025, which has increased monthly premiums for many households. Additional pressure is coming from higher overall medical spending, the growing adoption of newer and more expensive treatments, such as GLP-1 drugs, and insurers pricing in expectations of a smaller, higher-risk insured pool. 

• Clothing & Footwear: +3.1% MoM | +2.6% YoY.  Apparel costs are rising primarily due to import tariffs, which are now being passed through to consumers as new season inventories arrive at higher price points. This has been compounded by ongoing supply chain disruptions, which have increased both production and shipping costs, particularly amid elevated energy prices. These higher retail prices are also accelerating the growth of the resale market, where second-hand fashion is increasingly driven not just by sustainability considerations, but by economic necessity.

• Education: +2.8% MoM | +4.5% YoY. Education costs, particularly higher education tuition, are rising due to a combination of multi-year approved tuition increases and funding pressures. For example, the University of California system has approved a 5% annual increase, while Utah’s higher education board implemented average increases of around 3% across its eight public institutions following budget cuts. These increases are partly driven by reduced state and federal funding, creating budget shortfalls that institutions are offsetting through higher tuition. In Utah alone, lawmakers cut over $60 million from higher education budgets, with similar patterns emerging across other states. Rising operational costs are also contributing to the upward pressure on education prices. 

• Transportation: +2.6% MoM | +3.9% YoY.  The increase is almost entirely driven by gasoline prices, which surged by more than 20% in March due to oil supply concerns linked to the U.S. and Israeli military conflict with Iran. 

• Utilities: -1.1% MoM | + 5.7% YoY. Utility prices declined in March, largely reflecting lower electricity rates from major providers such as PG&E in California. This decline is primarily due to tariff restructuring, which reduces per-kilowatt-hour usage charges by shifting fixed costs into a separate base service fee. Additionally, major technology companies, including Amazon, Google, Meta, Microsoft, OpenAI, and xAI have signed the Ratepayer Protection Pledge, committing to fund the infrastructure and energy required for their data centers, with the aim of preventing these costs from being passed on to households. Weather also played a role, as March was significantly warmer than February, with widespread heat across the Western and Central U.S. contributing to lower heating demand and making it one of the warmest March periods on record. 

• Communications: +0.0% MoM | -3.0% YoY. Prices for cellular services continue to decline amid intense competition, ongoing technological advancements and the expansion of more efficient network infrastructure. Despite broader inflationary pressures across the economy, the communications sector remains structurally deflationary, with consumers effectively receiving more value at lower cost. 

• Alcohol & Tobacco: +0.1% MoM | + 3.2% YoY. Alcohol prices are exerting downward pressure due to a significant slowdown in demand, which has led to excess inventory across producers and retailers. This is being reinforced by a structural shift toward moderation, particularly among younger consumers such as Gen Z, driven by greater health awareness. At the same time, consumers are trading down to more budget-friendly options, with premium spirits and high-end wines seeing the sharpest declines in demand. It is important to note that while retail alcohol prices have softened, prices at bars and restaurants remain under upward pressure. 

• Housing: +0.5% MoM | -0.4% YoY. Housing presents a mixed picture. Owner-occupied and rental components are showing modest growth, while other lodging categories, such as hotels and short-term rentals, continue to rise more sharply. 

  • Rentals: Rental prices are seeing a renewed increase, driven by seasonal demand as households typically move during the spring months. This is further compounded by rising landlord costs, including property taxes and maintenance. Additionally, the increase in mortgage rates, with the 30-year fixed rate rising from 6.0% to 6.5% over March, has discouraged potential homebuyers, keeping more households in the rental market for longer.

  • Owned: Downward pressure is driven by weakened buyer demand due to affordability constraints. Rising mortgage rates combined with elevated home prices have significantly stretched affordability, resulting in longer time on market and price reductions by sellers. While inventory has declined from mid-2025 highs, this tightening could place upward pressure on prices again in the near term. 

  • Short-term lodging: In contrast, hotel prices continue to rise strongly, supported by robust travel demand during the spring break season, event-driven surges, and sustained travel activity despite TSA constraints.

Inflation Outlook: Elevated and then gradually moderating

One of the most important indicators of longer-term inflation is growth in the M2 money supply. In February 2026, M2 increased by $198.2 billion, the largest monthly gain since August 2021. Since January 2021, M2 has expanded at an average pace of $57.2 billion per month, making the February surge a clear outlier and a development that warrants close attention.

Exhibit 8 – Growth in the M2 Money Supply

Source: Board of Governors of the Federal Reserve

Since December 2025, the Federal Reserve has transitioned away from quantitative tightening (QT) toward what it describes as “Reserve Management Purchases,” primarily through monthly T-bill buying to fine tune its balance sheet. While not formally classified as quantitative easing (QE), this shift represents a move toward balance sheet expansion. To date, only three months of data are available under this new regime. December and January recorded annualized M2 growth rates of 4.9% and 4.4%, respectively, levels broadly consistent with sub 2% inflation. However, February’s annualized growth surged to 10.6%, marking a significant deviation.

On a three-month average basis (December 2025 through February 2026), M2 growth stands at 6.5%, slightly above the ~6.3% level typically associated with stable 2% inflation. The key question is whether February represents a one-off adjustment or the beginning of a sustained acceleration in money supply growth. If the latter proves true, it could introduce renewed upside risks to inflation. Our base case is that this reflects a transitional phase as the Federal Reserve shifts from QT toward a more neutral, or potentially expansionary policy stance. Nonetheless, the near-$200 billion increase in February should be closely monitored.

Exhibit 9 – Truflation CPI YoY Rate vs the Monthly Change in Money Supply 

Source: Board of Governors of the Federal Reserve & Truflation

Beyond the potential impact of M2, several other key factors will shape the inflation trajectory in Q2:

• Commodity Prices: Commodity markets have moved sharply higher following the Middle East conflict. Even though prices remain below their 2022 peaks, near-term dynamics will depend heavily on how the situation evolves, particularly the status of the Strait of Hormuz. Current indications suggest the conflict may persist through April, keeping commodities elevated. Prices could rise further before normalizing, with stabilization likely occurring 1–2 months after supply disruptions ease. 

• Services Inflation: Services inflation has moderated somewhat through 2025, particularly in housing and wages, but remains sticky. If wage growth stabilizes or reaccelerates, it could keep core inflation elevated. 

• Consumer Resilience: Strong retail sales, supported by tax refunds and residual savings, continue to underpin consumer demand. This resilience may limit the pace of disinflation. 

• Tariff Policy: Tariffs are currently at around 10%, but there is a potential for temporary increases to 15%. However, based on current assumptions, tariffs are likely to have only a modest impact on the overall CPI trajectory. 

The most likely outcome is a choppy, range-bound inflation environment, with headline CPI highly sensitive to energy volatility, while core inflation continues a gradual, but uneven moderation.

Truflation data suggests that goods inflation is likely to increase in the near term, driven primarily by energy-related supply chain disruptions. Rising gasoline prices are already feeding into higher transportation and shipping costs, which have increased by approximately 20% month over month. This points to a more energy-driven inflation dynamic, rather than the broad-based inflation seen during the pandemic. 

Much will depend on the duration of the Middle East conflict, particularly the extent and persistence of disruptions in key shipping routes. Given the elevated uncertainty, the margin for error in forecasts is higher than usual. Our base case is:

• April CPI: 3.4% – 3.5% 

• May–June: Gradual cooling 

• End of Q2: 2.9% – 3.0% 

If energy prices reverse more quickly than expected, inflation could fall closer to ~2.7% by the end of the quarter. Looking ahead to Q3, CPI is expected to decline further toward ~2.3%, stabilizing around that level through the remainder of the year.

Summary

The combination of rising energy prices, a potential shift in monetary conditions, and resilient consumer demand creates a complex inflation backdrop. While structural disinflationary forces remain in place, near-term risks are tilted to the upside.

The recent downward revision in GDP serves as a gut check amid rising energy prices, increasing the risk of a stagflationary environment. With inflation already above target and energy costs climbing, the Federal Reserve faces a more challenging policy landscape. The likelihood of rate cuts in 2026 has diminished and the possibility of a more prolonged pause cannot be ruled out.

About Truflation

Truflation provides a set of independent inflation indexes drawing on 30+ data partners/sources and more than 15 million product prices across the US. These indexes are released daily, making it one of the most up-to-date and comprehensive inflation measurement tools in the world. Truflation has been leveraging this measurement tool to predict the BLS CPI number, with a 99.93% accuracy in predicting inflation in the last 12 months.

APPENDIX A

Truflation Category Percentage Change Data (Month-over-Month and Year-over-Year). All Data is based on March 2026