How has inflation affected the U.S. economy in the first quarter of 2025?

Inflation eased during the first quarter of 2025, but it did not mean everyday costs returned to earlier levels. Prices were still higher than a year before, so households continued to feel pressure on groceries, housing, services, and other regular expenses.

The Consumer Price Index rose 3.0% over the year in January, 2.8% in February, and 2.4% in March, according to the Bureau of Labor Statistics. March’s overall index slipped 0.1% from February, largely reflecting lower gasoline prices. That single-month decline was modest: it did not undo the price increases of previous years. Shelter and many service costs also remained persistent.

What that meant for households and businesses

When prices rise more slowly, budgets may become easier to manage, but consumers still pay the higher prices already built into the economy. Families with less room in their budgets had to make trade-offs, while businesses faced continued pressure from costs and uncertainty about future prices. The effect varied by household and industry; falling gasoline prices offered some relief, while housing costs remained a concern.

The Federal Reserve kept its benchmark interest-rate target at 4.25%–4.50% during the quarter. With inflation still above its 2% goal and the outlook uncertain, borrowing costs stayed relatively high for consumers and businesses. That can make mortgages, car loans, credit-card balances, and business investment more expensive.

Inflation wasn’t the whole story behind the economy

Real U.S. GDP contracted at a 0.3% annualized rate in the first quarter, in the Bureau of Economic Analysis’s initial estimate. That should not be read as an inflation-driven downturn: a sharp rise in imports, as businesses brought goods into the country, was a major drag on the GDP calculation. Consumer spending continued to grow, but more slowly than in the previous quarter.

So the quarter brought some welcome cooling in headline inflation, alongside continued cost-of-living pressure and an uncertain economic outlook. The distinction matters: slower inflation means prices are rising more slowly, not that the overall cost of living has gone back down.