The SPDR S&P 500 ETF Trust SPY SPY traded higher by 1% on Wednesday morning after the Labor Department reported an 8.5% year-over-year increase in the consumer price index in the month of July, a potential sign that inflation may finally have peaked.
What Happened: The headline CPI rose 8.5% in July, down from 9.1% in June. June had marked the highest CPI inflation reading since November 1981. The July CPI reading also came in below economist estimates of 8.7%.
Core inflation, which excludes volatile food and energy prices, was up 5.9% in July, below economist estimates of a 6.1% gain.
The Labor Department said gasoline prices dropped 7.7% month-over-month in July, helping to offset rising food and shelter prices.
Food prices were up 1.1% month-over-month and 10.9% compared to a year ago. Energy prices were down 4.6% in July but still up 32.9% over the last 12 months. Shelter prices were up 0.5% on a monthly basis and are up 5.7% from a year ago.
The latest CPI inflation reading comes after the Labor Department reported earlier this month that U.S. wages grew 5.2% year-over-year in July. Unfortunately, the latest inflation numbers suggest prices are still rising faster than wages for many Americans.
Voices From The Street: Nancy Davis, founder of Quadratic Capital Management and portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund IVOL, said Wednesday's CPI reading is likely a big relief for the Federal Reserve.
"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," Davis said.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the Federal Reserve is likely focused on the fact that core CPI remained steady month-over-month at 5.9% in July.
"One month doesn’t make a trend, but at least headline is coming down and core stopped going up," Zaccarelli said.
Quincy Krosby, chief global strategist for LPL Financial, said the Fed needs the next Personal Consumption Expenditure (PCE) report later this month to confirm the encouraging CPI data.
"Markets are enjoying the CPI report suggesting that inflationary pressures are easing, and the trajectory is moving in the right direction," Krosby said.
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