US stocks heated up Wednesday morning after a softer-than-expected inflation print gave investors fresh confidence that the Federal Reserve’s rate-cut cycle still has room to run.
Core CPI inflation rose just 2.6% year over year, well below the 3% economists were expecting and the lowest reading since March 2021. Futures jumped on the release, with the SPDR S&P 500 ETF $SPY ( ▲ 0.76% ) extending premarket gains as traders recalibrated expectations for monetary policy.
This print didn’t just come in a little cool. It meaningfully undercut consensus.
Why this CPI mattered
On a monthly basis, core CPI rose just 0.159%, signaling that price pressures continue to ease as wage growth slows and the labor market loosens. That combination is exactly what the Fed has been waiting for to justify the rate cuts it has already delivered and potentially tee up more.
Markets moved quickly. Event contracts showed the implied probability of a January rate cut jumping from roughly 25% to above 30% following the data. Bond yields slid, equities rallied, and risk appetite ticked higher across the board.
There is some fine print. October inflation data was disrupted by the government shutdown, and the Bureau of Labor Statistics made assumptions to fill in the gaps. According to Inflation Insights’ Omair Sharif, the BLS effectively assumed zero growth for rent and owners’ equivalent rent in October, which helped pull down the two-month average.
Even with those caveats, economists agree the cooling trend is real.
What it means for the Fed
Bank of Montreal economist Sal Guatieri said moderating shelter costs, limited tariff pass-through, and softer wage growth are finally “corralling inflation,” giving the Fed more flexibility to focus on a weakening labor market as unemployment inches higher.
While the Fed officially targets core PCE inflation rather than CPI, the two are closely linked. Historically, core CPI runs about 40 basis points hotter than core PCE, meaning a 2.6% CPI print implies even more progress under the Fed’s preferred gauge.
If upcoming labor data continues to soften, this inflation report could end up being the one that fully reopens the door to easier policy in early 2026.