Wall Street cheered a sharper-than-expected slowdown in US inflation, sending stocks higher and bolstering expectations for Federal Reserve rate cuts later this year.

The latest inflation report offered a fresh sign that price growth in the US economy is cooling.

In February, the Consumer Price Index (CPI) rose 2.8% from a year earlier, easing from 3% in January and below the 2.9% economists had forecast. The core CPI, which strips out volatile food and energy costs, also slowed to 3.1% from 3.3%.

On a month-over-month basis, both the headline and core measures increased 0.2%, marking a sharp deceleration from the previous month’s 0.5% and 0.4% readings, respectively. The decline was driven by falling energy and transportation costs, with gasoline prices dropping 1% and airline fares plunging 4%.

Robin Brooks, senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance, said the inflation data was "good," but cautioned against overinterpreting one report.

"Today's February print is flattered by a bunch of one-offs, while the January print was way above the pace of underlying inflation. Once you filter all that noise out, core CPI is running around 0.25% m/m and is clearly slowing."

Still, some analysts see risks ahead. Rogier Quaedvlieg, senior economist at ABN Amro, said that “disinflation in goods that are heavily exposed to tariffs, such as cars and apparel, has stalled," raising concerns about upside risks in future inflation readings. Bank of America echoed this caution, noting that if core goods inflation persists at 0.2% month-over-month, "it will be challenging for inflation to hit the 2% target”.

Fed meeting in focus

The Federal Reserve is set to announce its latest monetary policy decision next week, with markets widely expecting the central bank to hold interest rates steady. However, investors will closely watch new economic projections for GDP growth, inflation, and unemployment, which could provide clues on when rate cuts might begin.

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Traders are currently pricing in a 78% chance of a rate cut in June, according to the CME Group’s FedWatch Tool. The latest inflation numbers strengthen the case for easing, but the Fed is likely to remain cautious, especially given lingering risks in key categories like services inflation.

Markets rally on cooling inflation

US stocks ended a two-day losing streak, with major indexes climbing after the inflation data reassured investors. The S&P 500 advanced 0.7%, while the tech-heavy Nasdaq 100 surged 1.5%.