SP 500, Nasdaq, and Dow smash records on upbeat inflation data

All three major stock indexes surged to record highs on Wednesday following new data indicating that inflation eased in April after a recent uptick.

The S&P 500, the tech-heavy Nasdaq Composite, and the blue-chip Dow all reached new record highs. The Consumer Price Index (CPI) showed a 3.4% increase in prices over the past year ending in April, down slightly from the previous month’s 3.5%.

The broad-market S&P 500 rose by more than 1.2%, breaking the 5,300-level for the first time and closing at 5,308.15. The Nasdaq increased by about 1.4%, setting a new record at 16,742.39. The Dow gained 350 points or 0.9%, nearing the 40,000-level and closing at 39,908. All three indexes are on track for a winning week.

Investors believe the cooler inflation data, combined with a separate report showing weak retail sales in April, increases the likelihood of a Federal Reserve interest rate cut this year.

“This supports a Fed rate cut in the fall,” wrote Gary Pzegeo, head of fixed income at CIBC Private Wealth US, in a client note on Wednesday. “Markets are anticipating a cut in September and pricing in a second cut by December.”

Wednesday’s inflation report matched economists’ expectations, a welcome change after higher-than-expected readings in January, February, and March.

“This was a good report following three hotter-than-expected CPI reports, suggesting those were temporary spikes rather than a persistent inflation issue,” said Tyler Schipper, an economics professor at the University of St. Thomas in Minnesota, in an interview with CNN.

On a monthly basis, prices rose 0.3%, slightly less than the 0.4% increase seen in the previous two months, according to the Bureau of Labor Statistics’ CPI report.

Economists had predicted a 0.4% monthly rise and an annual increase of 3.4%, according to FactSet consensus estimates.

Rising gasoline and shelter costs accounted for over 70% of the monthly increase in overall inflation, the report noted.

Despite ongoing high housing costs and fuel prices, the report brought some relief: Grocery prices fell for the first time in a year, dropping 0.2% from March.

A key underlying measure of inflation showed further progress. Core CPI, excluding volatile categories like energy and food, slowed from 3.8% to 3.6%, its lowest rate since April 2021. Month-over-month, core CPI rose by 0.3%, the slowest pace since the end of last year.

While prices are cooling, some issues persist. Overall food prices and the cost of dining out saw some easing, with food price inflation steady at 2.2% annually and food away from home inflation falling to 4.1%, its lowest rate since May 2021.

New and used car prices continued to decline from record highs, though they remain expensive due to high interest rates and maintenance costs. Motor vehicle insurance rose 1.8% in April and 22.6% annually, while repair and maintenance costs were flat for the month but still high at 7.6% annually.

Apparel prices increased for the month, with categories such as men’s shirts and women’s suits rising nearly 3%. This could reflect broader global trade issues, potentially problematic for consumers and politicians later this year, according to Schipper.

However, April’s report did show slight progress in reducing shelter inflation, which eased to 5.5%, its lowest annual rate since May 2022.

Housing costs have been a persistent issue, said John Sedunov, professor of finance and real estate at Villanova University, noting that the government’s measurement of shelter costs has a significant lag. Private sector data indicates a cooling rental market.

Excluding housing costs, a “supercore” index measuring services inflation rose just 0.2% for the month, its slowest pace since last summer.

The Federal Reserve seeks meaningful progress on inflation before cutting interest rates, which are currently at a 23-year high after aggressive rate hikes to curb demand and tame inflation.

“The last couple of months suggested a stall in improvement, but this report indicates continued progress at a slow pace,” said Erica Groshen, a former BLS commissioner and senior economics adviser at Cornell University’s School of Industrial and Labor Relations, in an interview with CNN.

Inflation has significantly cooled from its peak of 9.1% annually in June 2022, and the economy has remained resilient, though there are signs of slowing spending. A separate report on Wednesday showed that US retail sales were flat in April.

“This could indicate consumers are reaching their spending limits,” Sedunov said. “If retail softens, there may be less pressure on prices in some areas, potentially moderating inflation further.”