The US stock market has experienced turbulence again. On Wednesday, the US stock index fell, with the Dow Jones Industrial Average dropping by as much as 600 basis points in early trading, due to mixed feelings among traders about inflation data.

According to the Labor Statistics Bureau, the Consumer Price Index for August showed a 2.5% year-on-year increase, which is the lowest inflation rate since the beginning of 2021. However, the core inflation, which excludes the volatile food and energy prices, was higher than expected, rising by 0.3% in the month, above the estimated 0.2% increase.

Investors were alarmed by the higher-than-expected data. This indicates that inflation is stubborn enough to the extent that a 50 basis point rate cut is unlikely at the next Fed policy meeting, which some investors had eagerly anticipated.

After the CPI data was released, according to the CME FedWatch Tool, the market expects an 83% probability of a 25 basis point rate cut by the Fed next week, up from 56% a week ago.

Julian Howard, Chief Multi-Asset Investment Strategist at GAM Investments, said in a statement, "Another month, another somewhat embarrassing data point." He also added that the latest data shows that core and service inflation appear to be "stubborn and unconquered."

He later added, "However, at least a comprehensive 0.5% rate cut seems less convincing. In addition, the Fed's dual mandate means it cannot base its aggressive rate cuts or the reasons for any rate cuts solely on the softness of the labor market."

While the market may be dissatisfied with the prospect of a substantial rate cut, a 50 basis point cut by the Fed could be a double-edged sword. Analysts have pointed out in recent weeks that a 50 basis point cut could make the market concerned about a significant slowdown in the economy. On the other hand, a 25 basis point cut would mean that interest rates would remain at a higher level for a longer period of time.

Investors are closely watching the labor market for further signs of weakness. Thursday's jobless claims will be the next labor market indicator before next week's Federal Reserve meeting.

"The job market will continue to be a factor," said Gina Bolvin, President of Bolvin Wealth Management Group, in a statement. "Today's inflation data solidified the expectation of a 25-basis-point rate cut next week, and the possibility of a 50-basis-point cut is no longer there," she added.

The Department of Labor stated that housing costs are a major contributing factor to inflation, noting that housing inflation rose by 0.5% in August.

However, Preston Caldwell, the US economist at Morningstar, stated that with estimated year-on-year market rent growth of approximately 2%, housing costs may soon decrease.

He said in a statement, "As long as this situation continues, housing inflation will inevitably decrease."

Even after adjusting their expectations, the market still expects the Fed to moderately cut rates by the end of this year. Investors anticipate an 84% chance of a 100-basis-point or greater rate cut by December, but future rate cuts will continue to depend on employment and inflation data.

Chris Zacarelli, Chief Investment Officer at Independent Advisor Alliance, stated, "If the economy continues to slow—rather than abruptly fall into a recession—the Fed will be able to cut rates at a pace of 25 basis points per meeting."

He added, "Given the current situation, that is, Fed rate cuts, unemployment near multi-decade lows, and an expansion (albeit slowing) economy, once we get through the volatility before most of the presidential election, the market should be able to reach historical highs again."

Editor/Somer