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July Inflation Slows to 8.5%, Paring Fed Rate Bets: Stocks Surge

U.S. inflation slowed notably last month, data from the Bureau of Labor Statistics indicated Wednesday, setting the possibility of a pause in Fed rate hikes.

Updated at 11:35 am EST

U.S. inflation slowed notably last month, data from the Bureau of Labor Statistics indicated Wednesday, setting the possibility of a pause in Fed rate hikes and triggering a big pre-market jump for U.S. stocks.

The headline consumer price index for the month of July was estimated to have risen 8.5% from last year, down from the 9.1% pace recorded in June and firmly inside the Street consensus forecast of 8.7%. The June reading was the fastest since December of 1981.

On a monthly basis, inflation was flat the BLS said, compared to the June increase of 1.3% and a May reading of 1.1% and again fell below the Street forecast of a 0.2% acceleration.

Gas prices were a big component to the softer reading, as the national average cost for a gallon of gas looks set to fall below the $4 mark for the first time since early March this week, pulling prices more than 21% lower from their early June record highs amid run of fifty consecutive days of decline.

So-called core inflation, which strips-out volatile components such as food and energy prices, rose 0.3% on the month, and 5.9% on the year, the report noted, with both the annual and monthly reading coming inside Street forecasts.

"The deceleration in the Consumer Price Index for July is likely a big relief for the Federal Reserve, especially since the Fed insisted that inflation was transitory, which was incorrect," said Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund  (IVOL) .

"If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening and if the market starts to price in fewer rate hikes, we expect the yield curve to steepen," she added. "While the Fed has hiked interest rates by 225bps already this year, the market is pricing in an additional 117bps of hikes still to come in 2022."

On Wall Street, the S&P 500 gained 81 points in the opening hours of trading while the Dow Jones Industrial Average surged just under 550 points. The tech-focused Nasdaq gained 330 points. 

Benchmark 2-year Treasury note yields fell 9 basis points to are trading at 3.121% while 10-year notes were pegged at 2.759%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 1.4% lower at 104.790.

The CME Group's FedWatch is pricing in a 37.5% chance of a 75 basis point Fed rate hike in September, down from 66.5% before the inflation release, which would take its target rate to between 3% and 3.25%.

The Atlanta Federal Reserve's GDPNow forecasting tool, a real-time benchmark, suggests the U.S. economy is growing at a 1.4% clip, following contractions in both the first and second quarters of the year.