The stock market's fear gauge is sinking to 4-month lows as risk appetite grows after inflation cooled in July

• VIX, the US stock market's so-called fear gauge, dropped Wednesday in the wake of the July inflation report.
• Investors drove VIX below 20 for the first time since April while they sent the S&P 500 and the Nasdaq flying higher.

A cooldown in consumer price inflation in July ignited risk appetite among stock investors Wednesday, driving down the market's so-called fear gauge to its lowest in months.

The Cboe Volatility Index, better known as VIX, fell as much as 9.1% to 19.79, the weakest level since April 20. The index slightly pared its loss to 8.9% during afternoon trade. The move coincided with a surge in US stocks after the US government outlined a cooling in headline inflation to 8.5% in July, a still-scorching rate but better than had been anticipated.

Stocks soared as investors priced in expectations the Fed may opt to raise interest rates by 50 basis points in September rather than push up rates by 75 basis points at a third straight meeting.

"The Federal Reserve now has something it hasn't had in months: flexibility," Christian Hoffmann, portfolio manager at Thornburg Investment Management, wrote in a note Wednesday. Thornburg oversees $42 billion in client assets.

The S&P 500 advanced about 2% intraday as all 11 of its sectors bounced up, led by the materials and communication services groups. The Nasdaq Composite shot up nearly 3% during the session. Large-cap tech stocks spiraled into a bear market earlier this year as investors priced in expectations the Federal Reserve would aggressively raise interest rates to ease hot inflation.

July headline inflation of 8.5% was down from June's 41-year high of 9.1%, as a drop in gas prices offset increases in food and shelter. The fresh reading was also lower than the 8.7% Bloomberg consensus estimate.

Core CPI, which strips out food and energy prices, was unchanged at 5.9% in July. Investors had anticipated, on average, a 6.1% reading.

"The strong jobs number," for July released last week, "could also provide some cover and allow another hawkish hike, though the CPI number argues for a more measured Fed approach," said Hoffmann.

Last week, the Labor Department said the US economy in July added a whopping 528,000 jobs, trouncing expectations of 250,000 jobs. The report quelled recession worries but wage pressure and strength in the labor market suggested the Fed would stick with its rate-hike campaign.

A Fed rate hike in September would be the fifth this year. The key Fed funds rate currently stands at a range of 2.25% to 2.5%. The Federal Open Market Committee, which sets interest rates, will meet on September 20-21.