The Federal Reserve has successfully reduced inflation from over 9%, but nobody told them that the last mile would be so difficult. In recent months, “hot” inflation reports have kept Wall Street anxious about potential interest rate adjustments from its current 5.25-5.5%. However, Wednesday’s May Consumer Price Index (CPI) report finally showed some encouraging signs.

• CPI inflation remained essentially unchanged year-over-year (YoY) at 3.3% — driven by slower price increases in food (+2.1%) and gasoline (+2.1%).
• Core inflation, which excludes food and energy prices, rose just 3.4% YoY — its lowest level since Apr. 2021.

Window of opportunity: Despite inflation still exceeding the Fed’s 2% target, investors welcomed the May data as progress, especially after  disappointing reports that had tempered expectations for interest rate cuts this year. Analysts initially forecasted up to six rate cuts by 2024’s end — but the Fed now anticipates only one. Nonetheless, investors pushed the S&P 500 to new highs on the developments, with the index rising 1% on Wednesday.