Stock market today: Stocks fall as annual inflation slows but monthly CPI notches surprise increase

• US indexes were mixed on Wednesday as traders took in the latest inflation data.
• Core inflation rose 0.3% in August, slightly above economists' expectations.

US stocks traded mixed on Wednesday as investors took in last month's inflation report, which showed an unexpected increase in the monthly core consumer price index.

The Dow Jones Industrial Average was down more than 400 points shortly after the opening bell. Bond yields rose as traders readjusted expectations for a jumbo rate hike of 50 basis points at next week's Federal Open Market Committee meeting.

August inflation came mostly in line with economists' expectations, with the consumer price index rising 2.5% year-per-year last month — the slowest pace of inflation recorded since February 2021.

But core inflation, which excludes more volatile food and energy prices, rose 0.3% for the month, slightly hotter than anticipated.

The surprise increase led investors to almost completely discount the possibility of a 50 basis point rate cut at the Fed's next policy meeting. Markets are now pricing in an 83% chance central bankers will trim rates by 25 basis points, up from 66% odds priced a day ago, according to the CME FedWatch tool.

"Core inflation beating expectations in August should tilt the Fed toward an initial 25 bps rate cut next week," Josh Jamner, an investment strategy analyst at ClearBridge Investments, said in a note on Wednesday.

"Further signs that inflation may be a bit stickier than previously thought would likely result in a slower and shallower cutting cycle. This would be a disappointment to short-term bond markets," he added, noting that investors had priced in over 250 basis points worth of cuts by the end of next year.

"The August CPI report was like the Hippocratic Oath, it did no real harm to the financial markets," Jack McIntyre, a portfolio manager at Brandywine Global, wrote in a note. "A 50bps cut should not be in the cards as the recession call needs further deterioration in the labor market and the Fed likes its optionality."

Fed officials are set to meet next week to discuss the central bank's next policy move. The latest inflation data is expected to be a major input for central bankers, in addition to producer price data and jobless claims on Thursday.

Here's where US indexes stood shortly after the 9:30 a.m. opening bell on Wednesday:

• S&P 500: 5,467.46, down 0.51%
• Dow Jones Industrial Average: 40,330.96, down 1% (406 points)
• Nasdaq composite: 17,029.10, up 0.02%

Here's what else is going on:

• Ally Financial plunged 19% after its CFO said borrowers were struggling.
• Here's why the stock market isn't hitting new highs anytime soon, according to Wells Fargo.
• The best week of the year to buy a home is coming up.
• Here's why oil prices have cratered to their lowest level in nearly 3 years.

In commodities, bonds, and crypto:

• West Texas Intermediate crude oil rose 1.73% to $66.89 a barrel. Brent crude, the international benchmark, ticked higher 1.47% to $70.21 a barrel.
• Gold was lower by 0.26% to $2,509.97 an ounce.
• The 10-year Treasury yield climbed two basis points to 3.667%.
• Bitcoin inched higher 0.2% to $57,011.