What May's CPI Report Means For the Federal Reserve's Interest Rate Decisions?

Lower inflation than expected in May could encourage officials at the Federal Reserve to lower interest rates sooner than financial markets previously expected.

On Wednesday, the Bureau of Labor Statistics reported that inflation in May rose 2.4% year-over-year. However, housing costs were the most significant driver of inflation. Economists did not see prices rise significantly in the categories they expected—the goods that are being tariffed at the highest rates.

Fed officials have said they have held off on cutting the central bank’s benchmark interest rate this year out of concern that tariffs could push up consumer prices. While there’s little chance of a rate cut at next week’s meeting, the report could ease some of those fears and accelerate the rate cut timeline.

“The Federal Reserve will take some solace from the improving consumer inflation trends, but not enough, in our view, to pull the trigger on another rate cut until September at the earliest,” wrote Scott Anderson, BMO’s chief U.S. economist. “Tariffs remain a threat to higher inflation in the months ahead—even with the tariff truce between the U.S. and China and the benign readings on inflation in recent months.”

Chances of an earlier rate cut rose slightly in the wake of the report Wednesday. Markets were pricing in a 57.1% chance the Fed would cut interest rates by a quarter-point in September, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That was up from 53.5% the day before.