May CPI Report Cools Fears, Boosts Markets Ahead of Fed Decision

Markets breathed a sigh of relief Wednesday morning after the May Consumer Price Index (CPI) report showed inflation pressures easing more than expected. With concerns mounting over persistent price pressures and the impact of newly imposed tariffs, investors were bracing for a hotter print. Instead, the data came in below consensus across all major metrics, sending equity futures higher and Treasury yields lower—an encouraging development for risk sentiment just a week before the Federal Reserve’s next policy decision.
For the past year, CPI reports have been among the most impactful economic releases, routinely sparking sharp moves in equities, bonds, and rate expectations. CPI days have become landmarks on index charts, often marking the largest intraday swings in a given month. While the Fed favors the PCE Price Index for policy decisions, CPI carries greater political and consumer weight, given its visibility and direct impact on household budgets.
Today’s CPI print delivered a decisive “cooler” surprise. Headline CPI rose just 0.1% month-over-month (vs. +0.2% est.) and 2.4% year-over-year (vs. +2.5% est.), with both figures marking a deceleration from April. Core CPI—which excludes volatile food and energy components and is closely watched by the Fed—also undershot expectations, rising 0.1% M/M (vs. +0.3% est.) and holding steady at 2.8% Y/Y (vs. +2.9% est.). This marks a critical win for markets fearing a resurgence in inflation just as growth concerns start to mount.
Breaking down the report, disinflationary forces were evident across key components. Energy prices declined 1.0%, driven by a 2.6% drop in gasoline. New vehicle prices fell 0.3%, while used cars and trucks—which have been a volatile inflation driver—also showed declines. Apparel and transportation services softened, helping ease core inflation. On the flip side, food and shelter prices rose 0.3%, with owners’ equivalent rent continuing to be sticky. Still, the broad takeaway was a welcome deceleration in inflation momentum.
From a market standpoint, the report was a clear positive. S&P futures surged over 20 points to 6,065 (+0.33%), while 10-year Treasury yields slipped back below 4.45%. Ahead of the print, options markets were pricing in a 1.5% implied move in the S&P 500—marking the most elevated CPI-day volatility since March 2023. That setup reflected deep investor anxiety around stagflation, with traders fearing a scenario where inflation reaccelerates even as economic growth slows. Today’s softer data helps reduce that risk and opens the door for a more dovish tone from the Fed.
Today’s release also includes insight into real earnings, with real average hourly earnings rising 0.3% M/M—a boost to consumer purchasing power that may support spending in the near term without exacerbating inflation risks. Importantly, the report comes just after a tentative U.S.-China agreement to ease certain trade restrictions. Though tariff rates on Chinese goods remain high, the recent “framework deal” provides some clarity and removes one source of market uncertainty.
In sum, the May CPI report reinforces a cautiously optimistic narrative. Inflation is still above target but moving in the right direction. The softer-than-expected reading reduces the risk of a hawkish Fed pivot and bolsters the case for rate cuts later this year—markets still expect the first reduction in September. For now, investors can breathe easier, but with core inflation still at 2.8% and shelter prices sticky, the Fed’s battle isn’t over.
With heightened options positioning and policy sensitivity, this CPI release was always going to be a pivotal moment. As markets rally and yields retreat, traders now await follow-through from tomorrow’s PPI report and next week’s FOMC meeting to confirm whether this cooling trend has staying power.
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