Good news for the average U.S. consumer as the annual inflation rate slowed more than economists expected in May, brightening the outlook for interest rate cuts this year ahead of a pivotal Fed meeting later on Wednesday.

This marks the second consecutive inflation report to come in lower than expected, bolstering hopes for a gradual return to the Fed's 2% target.

May Inflation Report: Key Highlights

  • The annual CPI inflation rate fell from 3.4% to 3.3% in May, below than the median economist projection of 3.4%. According to Econoday, the economist consensus ranged from 3.3% to 3.5%.
  • On a monthly basis, the overall CPI inflation stalled, decelerating from the prior 0.3% growth and coming in below expectations of 0.1%.
  • The energy index dropped by 2.0% over the month, driven primarily by a 3.6% decline in the gasoline index.
  • More than offsetting the decline in gasoline, the shelter index increased in May, rising by 0.4% for the fourth consecutive month.
  • Excluding food and energy, the core annual CPI inflation rate softened from 3.6% to 3.4%, below than the expected 3.5%.
  • On a monthly basis, the core CPI inflation advanced at a 0.2% rate, down from April's 0.3% and below expectations of 0.3%.
Market Reactions

Before the inflation report, traders had assigned a 54% chance of a rate cut in September 2024, factoring in a cumulative 43 basis points of cuts by year-end. The cooler-than-expected reading will likely raise expectations for a September rate cut and may lead market participants to bolster bets on a double rate cut by year-end.

Treasury yields fell across the board, with the policy-sensitive 2-year Treasury yield down by 12 basis points to 4.71%.

Futures on major U.S. equity indices rallied during premarket trading, with contracts on the S&P 500 up by 0.8 percentage points at 08:32 a.m. ET. Futures on the tech-heavy Nasdaq 100 rallied 1%.

Wall Street closed Tuesday's session in the green, with the SPDR S&P 500 ETF Trust (SPY  ) and the Invesco QQQ Trust (QQQ  ) up 0.24% and 0.69%, respectively.

Traders are now eagerly anticipating the Federal Reserve Open Market Committee (FOMC) meeting. The statement and new macroeconomic projections will be released at 2:00 p.m. ET, followed by Fed Chair Powell's press conference at 2:30 p.m. ET.