July CPI Comes In at 3.4%, Right on Forecast: Stocks Rise as Inflation Cools

The most important number of the week arrived this morning, and it came in almost exactly where forecasters expected. The July Consumer Price Index, which we previewed on Sunday, showed inflation cooling again, and the market responded with a quiet sigh of relief.

What did the July CPI report show?

Inflation kept easing, and every reading landed in line with the Dow Jones consensus we flagged in the preview:

• Headline CPI rose just 0.1% on the month and 3.4% over the past year, down from 3.5% in June.

• Core CPI (excluding food and energy) rose 0.2% on the month and 2.5% over the year, down from 2.6% in June.

In other words, no surprises. Prices are still rising faster than the Fed's 2% target, but the trend continues to point in the right direction, helped by relatively stable energy costs. For a refresher on how this number is built, see our guide on what the CPI is.

How did the stock market react?

Calmly and slightly higher. Because the print matched expectations, there was no violent move, just a steady grind up. In early trading:

• The S&P 500 rose about 0.3%

• The Nasdaq led with a gain near 0.6%

• The Dow added around 0.1%, and the small-cap Russell 2000 climbed about 0.3%

What does it mean for the Fed?

This is where the report matters most. Coming after a soft jobs report, an in-line and cooling inflation print takes pressure off the Federal Reserve. It makes another interest rate hike harder to justify, and traders responded accordingly: CME FedWatch odds of a September rate increase eased to roughly 42%.

That keeps the Fed comfortably on hold rather than tightening, the setup we walked through in what happens when the Fed changes rates. A hot number would have reopened the hike debate just as the labor market softens, which we covered in our latest market recap. Instead, the data cooperated.

Bottom line

July inflation did exactly what the market hoped: it cooled, to 3.4% headline and 2.5% core, without any nasty surprises. Stocks edged higher, yields fell, and the odds of a September rate hike dropped. It was not a dramatic report, and that was the point. In a market sitting near record highs, boring and in-line is a very good outcome. The next big test is next month's data, but for now, the inflation story is still moving the right way.

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