STORY: A key inflation report out Wednesday showed U.S. consumer prices did not rise at all in May, defying expectations of a slight uptick.

And the annual inflation rate cooled to 3.3%, down slightly from April. That reading also came in lower than economists' forecasts.

The data, from the Labor Department's Consumer Price Index, is welcome news for the Federal Reserve, which has hiked interest rates to lower inflation.

The Fed also keeps a close watch on the core inflation rate, which excludes volatile food and energy costs.

That number was also lower than the prior month's, according to the CPI, and reflected the smallest year-over-year gain since April 2021.

Though the annual inflation rate has slowed from a peak of 9.1% in June 2022, it continues to run above the Fed's 2% target.

Most analysts predicted the central bank would leave rates unchanged at the conclusion if its latest two-day policy meeting on Wednesday.

Financial markets now expect the Fed to start cutting interest rates in September, though some economists are leaning towards December. Others are not sure that borrowing costs will be lowered at all this year.