May Inflation Cools Sharply, Raising the Odds of a Fed Rate Cut This Fall

Updated on 13 June 2025

U.S. inflation cooled more than expected in May, reinforcing hopes that the Federal Reserve may begin easing interest rates as early as September. The latest Consumer Price Index (CPI) report showed moderation in key price categories, signaling that price pressures are beginning to stabilize after two years of volatility.

Inflation Slows Amid Falling Energy Costs

The CPI rose 0.1% in May, down from April’s 0.3% increase. Annually, inflation reached 2.4%, while core CPI — which excludes food and energy — rose 0.1% monthly and 2.8% year-over-year. Gasoline prices declined sharply, offsetting increases in housing and services.

Shelter costs, though still high, grew at a slower pace, while food prices held steady. This cooling trend supports the case that inflation is moving closer to the Fed’s 2% target without triggering a major economic slowdown.

Markets Respond with Rate Cut Optimism

Following the data release, Treasury yields fell and stock markets rose. Investors are increasingly pricing in at least two rate cuts by the end of 2025, with the first likely coming in September.

Fed fund futures now show more than a 70% probability of a September rate cut. Though the Fed remains cautious, recent soft labor market indicators and moderating inflation have bolstered confidence in a potential policy pivot.

Cautious Optimism Among Fed Officials

Despite the data, Federal Reserve officials have not yet confirmed any timeline for rate adjustments. Policymakers have reiterated their intent to see “sustained progress” on inflation before shifting policy. Some have also warned that new tariffs could put upward pressure on prices in the coming months.

Still, the May CPI numbers offer growing evidence that monetary tightening is achieving its goal — bringing inflation under control without severely damaging growth.

Investor Takeaway: Eyes on September

The May inflation data is a milestone in the Fed’s fight against inflation. For investors, it strengthens the case for a “soft landing” and supports bullish momentum in equities and bonds.

With the June FOMC meeting approaching and new labor data ahead, the road to a rate cut may depend on confirmation from June’s core PCE and employment reports.