Positive Inflation Report Gives Boost to Wall Street

United States stocks rose on Friday as a report showed that the price of goods has continued to cool, leading Wall Street to believe that the Federal Reserve will soon cut rates.

Stock market indexes, which measure how stocks perform, increased on Friday.

The S&P 500 went up 0.6 percent in morning trading, the Dow Jones Industrial Average rose 0.1 percent (or 56 points) and the Nasdaq composite rose 0.8 percent as of 10:47 a.m. ET.

These stock increases came as the U.S. Department of Commerce announced on Friday that prices rose just 0.2 percent from June to July. While this number is slightly up from the previous month’s 0.1 percent increase, it still shows that the price of goods is easing.

Inflation has remained unchanged at 2.5 percent compared to a year earlier, which is modestly above the Federal’s goal of 2 percent.

Meanwhile, the central bank is on track to cut rates at its meeting next month. The stock market is anticipating that the Fed will cut its benchmark rate by 1 percent by the end of the year. As of July 30, the rate is at 5.25 to 5.50 percent.

The federal funds rate is the target interest rate range at which banks borrow and lend their excess reserves to each other overnight. When the Fed cuts rates, stocks typically increase because the borrowing costs for public companies should fall, making it cheaper for the companies to increase their earnings.

Additionally, if the federal funds rate decreases, it can cause inflation to decrease because short-term interest rates are lower, which increases the supply of money and makes it cheaper to get credit.

If Inflation Is Cooling, Why Am I Not Feeling It?

While inflation has cooled, it doesn’t mean Americans will feel it in their pockets.

William Hauk, associate professor in the Department of Economics at the University of South Carolina, explained in a Time magazine article published on August 14: “If inflation goes down, it means that the rate at which prices increase is slowing down, but it generally is not going to mean that prices are going down.”