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Updated from 10:18 a.m. EDT

Friday's economic data gav the stock market a strong dose of morning coffee, and even more assurances that the

Federal Reserve

will remain on hold when it meets next week.

The Labor Department reported Friday that the consumer price index rose 0.2% in August, and the core consumer price index, which removes energy and food costs, rose 0.2% as well. The reports were in line with expectations.

August marks the second consecutive month in which core CPI has come in at 0.2%, after four straight months of 0.3% readings. The prior streak of higher readings had several economists and some investors concerned about inflation, even as the Fed was setting up to pause in August after two years of rate hikes. The Fed has consistently posited, however that slowing economic growth will stamp out the inflation threat.

Following Thursday's lackluster retail sales data, Friday's weak report on industrial production seems to support the Fed's thesis. The Fed reported that industrial production fell 0.1% in August, weaker than the 0.2% climb expected by economists. At 82.4%, capacity utilization was a hair below expectations and down from 82.7% in July. Separately, a report on consumer sentiment from the University of Michigan was slightly higher than expected.

The reports make Fed Chairman Ben Bernanke and the Fed's forecast look very smart. But data are never that clear-cut, and the Fed is unlikely to remove what has been coined its "tightening bias" from its rates statement. In other words, expect more talk of vigilance and inflation when the Federal Open Market Committee meets on Sept. 20.

Notably, core consumer prices have risen 2.8% year over year, the greatest pace since March 1996, according to Anthony Crescenzi, chief fixed income analyst at Miller Tabak and


The year-over-year reading leaves core inflation running faster than the Fed is comfortable with, according Crescenzi, who further notes that core CPI was up 0.2423% before rounding, just a hair off of a 0.3% reading. "The Fed would rather see the inflation rate at 2.0% or less, and it certainly won't be calmed by the 2.8% year over year gain," Crescenzi writes.

In the meantime, the data and renewed weakness in oil prices could send the major averages past their May highs and possibly beyond.

The downdraft in energy prices helped push down headline consumer inflation and offset the weakening housing market when it comes to consumer spending and retail sales. Energy prices were up 0.3% in August after rising 2.89% in July, according to the Labor Department.

"Falling energy prices, moderating inflation and healthy holiday sales will provide a formula for stronger corporate profits," says Peter Morici, professor at the University of Maryland School of Business. "This will ignite investor confidence."

Stocks did rally early in reaction to the data but were off their morning highs midday on Wall Street.

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After trading as high as 11,613 earlier, the

Dow Jones Industrial Average

was recently up 0.3% to 11,566, while the

S&P 500

was up 0.2% to 1319.90 vs. its morning high of 1324.65. The

Nasdaq Composite

was up 0.2% to 2233.38 after trading as high as 2247.

The Treasury bond market was also rallying on the data, with the 10-year note up 7/32 to yield 4.76%.

Adobe Systems

(ADBE) - Get Adobe Inc. Report

was helping pace the rally, recently up 11.4% after

reaffirming its guidance late Thursday.

Among stocks in the news,


(F) - Get Ford Motor Company Report

was down 12.5% after saying it would accelerate its restructuring plan and cut its salaried workforce by one-third, or around 14,000 jobs.




lowered its operating profit forecast for this year to $6.4 billion, on the basis of an expected operating loss of around $1.2 billion for its U.S.-based Chrysler group. DaimlerChrysler shares were recently down 6.8%.

News from the other automakers was dragging down shares of

General Motors

(GM) - Get General Motors Company Report

, recently off 2.2%.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


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