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Grocery prices fell for the first time in a year, according to the latest consumer inflation report.
CNN  — 

All three major indexes surged to record highs Wednesday after new data showed that inflation cooled in April after ticking up recently.

The S&P 500, tech-heavy Nasdaq Composite and blue-chip Dow all closed at new record highs after the latest Consumer Price Index showed that prices were up 3.4% for the 12 months ended in April, easing from 3.5% the month before.

The broad-market S&P 500 gained more than 1.2% on Wednesday and cracked the 5,300-level for the first time, closing at 5,308.15. The Nasdaq was about 1.4% higher, setting a new record at 16,742.39. The Dow, meanwhile, was up 350 points or 0.9% and teetered near the key 40,000-level, closing at 39,908. All three major indexes are tracking toward a winning week.

Investors believe that the cooler inflation reading, coupled with a separate report showing weak retail sales in April, increases the likelihood that the Federal Reserve will cut interest rates this year.

“Taken [together with retail sales] this supports a Fed rate cut in the fall,” Gary Pzegeo, head of fixed income at CIBC Private Wealth US, wrote in a note to clients Wednesday. “Markets are discounting a cut in September and have moved to price in a second cut by December.”

Wednesday’s report landed mostly in line with economists’ expectations, which is a welcome turnabout from January, February and March, when CPI (and other inflation gauges) came in hot, hot, and hot.

“This was a good report in the context of three hotter-than-expected [CPI] reports, and it makes it look like potentially those were bumps in the road rather than a really stagnant inflation environment,” Tyler Schipper, economics professor at the University of St. Thomas in Minnesota, told CNN in an interview.

On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the two months prior, according to the Bureau of Labor Statistics’ CPI report.

Economists were expecting a 0.4% monthly increase and an annual gain of 3.4%, according to FactSet consensus estimates.

Rising gasoline and shelter costs accounted for more than 70% of the monthly increase in overall inflation, according to the report.

While elevated housing costs and high prices at the pump continue to weigh on Americans, Wednesday’s report did provide some welcome news on another staple spending area: Grocery prices fell for the first time in a year, dropping 0.2% from March.

A closely watched underlying measurement of inflation showed even more progress. Core CPI, which strips out the more volatile categories of energy and food, slowed from 3.8% to 3.6%, its lowest rate since April 2021. From the month before, core CPI ticked up by 0.3%, its slowest pace since the end of last year.

Prices are cooling but some pain points remain

In addition to grocery prices falling for the month, overall food prices and the cost of going out to eat saw some easing as well. Food price inflation held pat at 2.2% annually, while food away from home inflation ticked down to 4.1%, its lowest rate since May 2021.

New and used car prices continued to fall from record heights; but, especially in this period of high interest rates, they remain costly endeavors — not only to purchase but also to maintain.

Motor vehicle insurance continued its painful rise in April, climbing 1.8% for the month and rising to 22.6% annually. Repair and maintenance costs were flat for the month but are still running well above overall inflation at 7.6% annually.

Apparel prices jumped higher for the month, with some categories such as men’s shirts and women’s suits up nearly 3%.

For those to leap higher at a time when goods prices are seeing disinflation (in some cases, outright deflation), could be a reflection of broader trade problems globally and a potential issue for consumers — and incumbents — later this year, Schipper said.

“It might not be particularly problematic now; but if you think about the fall, when it’s election season, and people are doing back-to-school shopping, that could be a category that becomes politically problematic,” Schipper said.

A slow drift downward

However, April’s report did show some slight progress on what’s been the biggest Achilles heel: Shelter inflation eased to 5.5%, its lowest annual rate since May 2022.

Housing costs “have been a pretty persistent area of pain over the past several years,” John Sedunov, professor of finance and real estate at Villanova University, told CNN.

The housing component of the CPI has proved frustrating for economists and other observers because the government’s measurement of shelter costs come with a considerable lag. Private sector sources of real estate data have shown a cooling rental market.

When taking those housing costs out of the equation, a closely watched “supercore” index measuring services inflation that excludes shelter costs rose just 0.2% for the month, its slowest pace since last summer.

The Federal Reserve has been wanting to see meaningful process on inflation before it starts trimming back interest rates. Those rates are at a 23-year high following an aggressive, yearslong rate-hiking campaign by the central bank to throw water on smoldering demand and tame decades-high inflation.

“The last month or two had looked like maybe the improvement was stalling, and this [report] looks like it’s continuing at a slow pace,” Erica Groshen, a former BLS commissioner who serves as senior economics adviser at the Cornell University School of Industrial and Labor Relations, told CNN.

Inflation has cooled considerably after spiking to 9.1% annually in June 2022, and the economy has remained resilient in the process — although there are signals that the once-rampant pace of spending activity has cooled.

A separate report on Wednesday showed that US retail sales were flat in April.

“Potentially, that’s an indication of consumers getting tapped out,” Sedunov said. “At the end of the day, that retail softening is an indicator that maybe there’s going to be less pressure on prices in certain areas going forward, which could have a continuing moderating effect on inflation.”

CNN’s Nicole Goodkind contributed to this report.