Stocks advance as key inflation report matches expectations

U.S. stocks advanced Wednesday as Wall Street digested a key consumer price signal that should help shape the near-term outlook for interest rate policy. The S&P 500 (GSPC) and the tech-heavy Nasdaq Composite (IXIC) gained about 0.3%. The Dow Jones Industrial Average (DJI) hovered near a flat line.

The Consumer Price Index (CPI) showed that price increases remained broadly stable in July. Consumer prices rose 2.9% year-on-year in July, marking the first time since 2021 that headline inflation has fallen below 3%. On a “core” basis, excluding food and energy costs, prices rose 3.2% year-on-year. Both figures were broadly in line with Wall Street forecasts.

Wall Street rebounded Tuesday, helped by positive inflation data that could point to a similar move in consumer prices. The producer price index, which measures wholesale inflation in the U.S. economy, rose just 2.2% year-on-year in July, nearly in line with the Federal Reserve’s 2% target.

The aggregate of inflation signals could push the Fed closer to a rate cut. Even the Fed’s most aggressive members are signaling that they need a bit more positive data to be ready to support an interest rate cut. Further signs of slowing inflation, combined with a slowing jobs market, would likely put the Fed in a position to cut rates at its September meeting.

According to the CME’s FedWatch tool, traders are pricing in a Fed rate cut next month. The question is how much. Just over half of traders are betting on a deeper cut, of 50 basis points, while the rest are sticking with a 25-point cut.