US Underlying Inflation Holds at Slowest Annual Pace Since 2021, Fueling Rate Cut Expectations

Underlying inflation in the U.S. remained unchanged at 2.8% year-over-year in February 2026, marking the slowest pace since January 2021. This sustained disinflationary trend, driven by moderating services and shelter costs, signals increasing confidence that the Federal Reserve may begin lowering interest rates as early as June 2026. The persistence of low core inflation, measured by the Personal Consumption Expenditures (PCE) index excluding food and energy, has diminished concerns about entrenched price pressures. Despite a slight uptick in energy-related costs, the broader inflation trajectory reflects weaker demand and cooling labor market dynamics. The 2.8% figure remains below the Fed’s 3% threshold for sustained rate cuts, further strengthening expectations of easing monetary policy. Financial markets reacted swiftly: the S&P 500 rose 1.4% on the news, with technology stocks leading gains. Apple Inc. (AAPL) advanced 2.3%, benefiting from lower discount rates and stronger consumer spending outlooks. Energy markets also shifted, with West Texas Intermediate crude (CL=F) falling 1.6% as softer demand forecasts weighed on prices, while the CBOE Volatility Index (^VIX) dropped to 13.7, signaling reduced market anxiety. The move toward rate cuts would likely strengthen risk assets, boost equities, and weaken the U.S. dollar, impacting global capital flows. Investors are now pricing in a 78% probability of a 25-basis-point Fed cut by the June meeting, up from 55% a month earlier.