June interest rate cut probability soars! Major U.S. inflation data released late at night

As inflation cools down and expectations for rate cuts rise, the CME “FedWatch Tool” shows that traders now assign an 83% probability to the Federal Reserve cutting rates in June, up sharply from 49.9% previously.

On Friday, February 13 (local time), the U.S. Bureau of Labor Statistics released the latest Consumer Price Index (CPI) data, indicating that U.S. overall CPI increased by 2.4% year-over-year in January, below market expectations of 2.5%, and down 0.3 percentage points from December 2024’s 2.7%, marking a recent low in inflation. Month-over-month, seasonally adjusted, CPI rose by 0.2%, also below the 0.3% market expectation, showing a significant cooling trend. Core CPI (excluding food and energy) increased by 2.5% YoY and 0.3% MoM, both in line with market expectations; the YoY increase was 0.1 percentage points lower than the previous month, the lowest since 2021.

Looking at the component data, price trends across categories show clear divergence. Housing costs, the main driver of CPI, rose only 0.2% MoM in January, with YoY growth slowing to 3%, indicating a narrowing increase. Food prices edged up 0.2% MoM, with five of six grocery categories rising; at-home food and dining out prices increased by 0.2% and 0.1%, respectively, with the full-year food inflation at 2.9%. Energy prices played a key role in the inflation slowdown, dropping sharply by 1.5% MoM in January, with gasoline down 3.2% MoM, and the energy index for the year slightly decreasing by 0.1% YoY. Vehicle prices remained weak, with new car prices up only 0.1% MoM, while used cars and trucks fell 1.8% MoM. Categories like auto insurance also saw declines. Additionally, prices for services such as airline tickets, personal care, and medical services rose slightly, partially offsetting the deflationary pressures in goods.

Following the data release, U.S. Treasury yields declined, and market expectations for rate cuts within the year increased significantly. The CME “FedWatch Tool” shows traders now assign an 83% chance of a rate cut in June, up sharply from 49.9% before the data. Industry experts responded positively to the inflation data. Heather Long, chief economist at Navy Federal Credit Union, stated that the sharp decline in inflation, along with cooling prices for food, gasoline, and rent, will provide substantial relief for low- and middle-income American households.

This inflation report presents a mixed picture of the U.S. economy, with “growth and inflation cooling” coexisting. On a macro level, the U.S. economy has shaken off the sluggishness seen early 2025. According to Atlanta Fed’s GDPNow, Q4 2025 GDP growth is estimated at 3.7%, indicating strong economic momentum. However, the labor market remains weak, with only 15,000 new jobs added on average per month in 2025, and consumer spending unexpectedly stagnated during last year’s holiday season, highlighting structural issues in the recovery. Notably, the import tariffs imposed in April 2025 did not trigger widespread inflation; their impact was limited to specific goods, contrary to some economists’ expectations.

Changes in inflation data also influence the Federal Reserve’s monetary policy decisions. Currently, U.S. inflation remains above the Fed’s 2% long-term target. There are divisions within the Fed: some regional Fed presidents lean hawkish, favoring continued tightening to suppress inflation, while Fed nominee Chair Kevin W. Wirth favors rate cuts, citing productivity gains from AI as providing room for easing. The market generally expects the Fed to pause its rate cut cycle that began in late 2025 and keep rates stable in the short term to assess the sustainability of inflation decline.

U.S. Treasury Secretary Janet Yellen expressed optimism about inflation trends, stating that the U.S. is experiencing an “investment boom” that will drive strong economic growth, with inflation expected to fall back to the Fed’s 2% target by mid-2026. She emphasized that economic growth itself is not the cause of inflation, and current government policies are focused on increasing market supply to address inflation at its root.

It’s important to note that the January CPI report was delayed due to a partial government shutdown, and CPI is not the Fed’s primary inflation indicator. The Fed pays more attention to the Personal Consumption Expenditures (PCE) Price Index, with December 2025 data scheduled for release on February 20, 2026. This data will be more critical for future monetary policy decisions. Market participants say ongoing attention to inflation components, labor market changes, and economic growth data is necessary to determine the timing of the Fed’s rate cut cycle.