Stocks Surge as Inflation Cools, Rate Cut Hopes Rise
Wall Street Reacts Positively to Unexpectedly Moderate Price Increases
Investor optimism propelled stock markets higher Wednesday as new data revealed a slower-than-anticipated rise in inflation, fueling speculation that the Federal Reserve may begin lowering interest rates sooner than previously expected. The positive reaction signals a potential shift in economic sentiment.
Inflation Data Offers Relief
The Consumer Price Index increased by 2.4 percent in May compared to the same period last year, a slight uptick from the 2.3 percent recorded the prior month. However, analysts emphasized that the 0.1 percent increase represents a deceleration in price growth, suggesting inflationary pressures are easing. According to the Bureau of Labor Statistics, the average price of new vehicles decreased by 0.4% in May, contributing to the overall moderation.
Robert Pavlik, senior portfolio manager at Dakota Wealth, noted, “Longer term there’s still concerns about Trump’s tariffs being inflationary but this report was better than expected and it fuels hope that the Federal Reserve will be able to step in with rate cuts later on this year.”
The figures were a welcome surprise to Wall Street, where forecasts had predicted a rise closer to 3 percent. Futures for the S&P 500, Nasdaq, and Dow Jones indices all jumped on the news, maintaining upward momentum throughout the morning trading session.
Trade Deal Progress Boosts Confidence
Adding to the positive market sentiment, President Donald Trump announced Wednesday that a trade agreement with China had been finalized, with Beijing committing to supply the US with magnets and rare earth minerals. Investors are now awaiting further details regarding the specifics of the trade talks and their potential impact on global markets.
While some economists initially anticipated that tariffs would have a more significant inflationary effect, the latest report suggests this has not yet materialized. Major retailers, like Walmart, have indicated they are absorbing some of the tariff costs rather than fully passing them on to consumers.
Prices for certain consumer goods have even declined, with smartphones falling 1.6 percent and airline fares dropping 2.7 percent from the previous month. According to a recent report by the Conference Board, consumer confidence in the U.S. rose to 102.0 in May, indicating a resilient consumer base despite ongoing economic uncertainties (Conference Board, June 2025).
Federal Reserve Rate Cut Expectations
Neil Dutta from Renaissance Macro explained, “Ultimately, if tariff rates are up, and core goods prices aren’t up by as much as the consensus thought it implies more margin squeeze at retailers and less price pass through.”
Traders now estimate a 75 percent probability of the Federal Reserve cutting interest rates by September, a significant increase from the 60 percent probability assessed the previous day.
Nicholas Hyett, investment manager at Wealth Club, cautioned, “President Trump has made no secret of the fact that he would like the Federal Reserve to cut interest rates.”
He added, “On the face of it these numbers should ease some of the inflationary worries… the challenge is that while inflation isn’t rising as fast as expected, it isn’t falling either.”
Despite the encouraging data, Hyett emphasized that the potential for future tariff adjustments and the overall economic outlook remain uncertain.
