US inflation drops to lowest level in more than two years as tariffs ease

US inflation fell unexpectedly in April, coinciding with President Trump’s announcement of significant reductions in tariffs, marking what he described as “liberation day.” The annual rate of price growth dropped to 2.3 per cent, down from 2.4 per cent in March. This is the lowest inflation rate recorded since February 2021, providing some relief for consumers amid ongoing uncertainties in global markets.

The decline was largely driven by falling fuel and food prices. Fuel oil costs were down 1.3 per cent, while food prices registered a slight decrease of 0.1 per cent. On a monthly basis, prices increased by 0.2 per cent in April, a step up from the 0.1 per cent decline observed in March but still falling short of analyst expectations.

Recent trade agreements have played a pivotal role in these shifts. The United States and China announced a deal to significantly reduce tariffs on goods between the two countries. By August, tariffs on Chinese imports to the US will drop from 145 per cent to 30 per cent, while tariffs imposed by China on American goods will fall from 125 per cent to 10 per cent. Additionally, a trade pact between the United States and Britain has eased tariffs on automobile and metal exports, providing further economic relief.

In response to these developments, Goldman Sachs revised its projection for a potential US recession, lowering its likelihood from 45 per cent to 35 per cent. The investment bank also updated its GDP forecast for the final quarter of the year, anticipating a growth rate of 0.5 per cent compared to the previously estimated 1 per cent decline. Analysts predict that the Federal Reserve could implement further rate cuts to stabilise the economy. The federal funds rate remains within the range of 4.25 per cent to 4.5 per cent, with expectations of three additional 0.25-point rate reductions in the coming months.

Though inflation has eased, some experts caution that challenges remain. Core inflation, which excludes volatile food and energy prices, increased by 0.2 per cent in April and remained steady at 2.8 per cent year-on-year. Capital Economics, a consultancy, anticipates that core inflation could rise as high as 3.5 per cent by the end of the year, despite the lower tariffs.

Markets responded favourably to the news of declining inflation. The S&P 500 rose by 0.81 per cent, while the Nasdaq climbed by 0.95 per cent. However, the dollar eased by 0.33 per cent against a basket of rival currencies, and ten-year US government bond yields remained steady at 4.481 per cent.

While the falling inflation rate offers some breathing room for policymakers, the prospects for sustained economic recovery depend on continued trade stability, effective monetary policy, and careful management of sector-specific pressures, particularly in energy and manufacturing. Analysts will be closely observing the Federal Reserve’s upcoming moves and broader global economic developments as the year progresses.