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US Treasury strengthens as core inflation rises less than expected in May
A softer-than-expected monthly core CPI print gave bond markets a brief reprieve, but headline inflation at 4.2% and rising rate-hike odds tell a more complicated story.
Treasury prices edged higher after May’s core inflation reading came in a touch cooler than Wall Street anticipated on a monthly basis.
Core CPI, which strips out volatile food and energy prices, rose 0.2% month-over-month in May 2026. Economists had penciled in 0.3%. That single tenth of a percentage point was enough to nudge Treasury yields lower and prices slightly higher, as traders recalibrated their near-term expectations for Federal Reserve policy.
The numbers behind the number
On a year-over-year basis, core CPI landed at 2.9%, up from 2.8% the prior month and matching consensus forecasts. That 2.9% reading marks the highest level since September 2025. Shelter costs, transportation services, and medical care were the primary culprits pushing the annual figure higher.
The headline CPI number, which includes food and energy, surged to 4.2% year-over-year, up from 3.8% in April 2026 and the hottest reading since April 2023. The energy index alone was up 23.5% year-over-year, a surge tied to geopolitical tensions related to the Iran conflict.
What traders are actually betting on
Despite the softer monthly core print, prediction markets aren’t exactly pricing in a dovish pivot. After the CPI release and in the context of recent strong employment data, the probability of at least one Fed rate hike by year-end climbed to between 52% and 54%.
The effective federal funds rate currently sits near 3.62%, within the Fed’s target range of 3.50% to 3.75%.
What this means for crypto investors
For anyone holding digital assets, the inflation-rates nexus is the macro variable that matters most right now. Bitcoin and the broader crypto market have historically shown sensitivity to shifting rate-hike expectations, and this report is a case study in why.
The energy-driven nature of the headline inflation spike adds another layer of uncertainty. If geopolitical tensions around Iran ease, headline CPI could fall quickly, potentially pulling rate-hike odds lower and giving risk assets room to breathe.
The key metric to watch going forward is not just next month’s CPI print but how prediction market odds for a 2026 hike evolve. If those probabilities drift above 60%, expect meaningful pressure on digital asset prices. If they fall back toward 40%, that’s when risk appetite could return in earnest.