Tuesday’s news was good for inflation, and investors are hoping for further improvement on Wednesday when the Labor Department releases its July consumer price index report.

With a score of one down and one more to confirm that the price jump at the beginning of the year was either a fluke or the last gasp of inflation, a positive CPI reading could mean the Federal Reserve can turn its gaze to other economic challenges, such as a slowing labor market.

“At this point, the inflationary pressure that we saw build has really dissipated significantly,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. The recent pace of inflation “is not a problem… There is a widespread expectation that the worst is behind us.”

Like others on Wall Street, Baird expects the Fed to shift its focus in September from a tight policy stance to combat inflation to a somewhat more accommodative stance to avoid a possible weakening of the job outlook.

While consumers and business owners continue to express concerns about high prices, the tide has turned. The July Producer Price Index (PPI) report released Tuesday helped confirm optimism that the high inflation numbers that began in 2021 and spiked again in early 2024 are now a thing of the past.

The PPI report, considered a proxy for wholesale inflation, showed prices rose just 0.2% in July and about 2.2% from a year earlier. That figure is now very close to the Fed’s 2% target and indicates that the market push for the central bank to begin cutting rates is close to being met.

Economists surveyed by Dow Jones expect the CPI to also show increases of 0.2% in both the all-items reading and the core measure excluding food and energy. However, they are projected to show 12-month rates of 3% and 3.2%, respectively, well below their mid-2022 highs but still well within striking distance of the Fed’s 2% target.

Still, investors expect the Fed to begin cutting interest rates at its September meeting, given that inflation is weakening and so is the labor market. The unemployment rate has now risen to 4.3%, a 0.8 percentage point increase from last year that has triggered a recession flag known as the Sahm Rule.

“Given the attention being paid to the relative weakness in the labor market, given the fact that inflation is coming down fairly rapidly and I expect it to continue to do so over the next several months, it would be a surprise if the Fed didn’t begin to ease very quickly, presumably at the September meeting,” Baird said. “If they don’t do it at the September meeting, the market is not going to take it very well.”

A brief spike in weekly initial jobless claims, combined with other weakening economic indicators, had some in the market briefly looking for an emergency rate cut.

While that sentiment has faded, there are still concerns about the Fed’s slowness in easing monetary policy, just as it was slow to tighten when inflation began to climb.

Another benign inflation report “makes the Fed completely comfortable that they can shift their attention away from inflation and toward the labor market,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “They could have shifted their attention away from inflation and toward the labor market … months ago. Cracks are forming in the labor market environment.”

Amid the twin realities of falling inflation and rising unemployment, markets are pricing in the absolute certainty of a rate cut at the Federal Reserve’s Sept. 17-18 meeting, and the only question left is how much. Futures prices are roughly split between a quarter- or half-point reduction, and are heavily tilted toward the likelihood of a full percentage point reduction by year-end, according to CME Group calculations.

However, futures prices have been far from reality for most of the year. Traders started the year anticipating a rapid pace of cuts, then pulled back and expected only one or two before the final turn in the opposite direction.

“I’m so curious about [Wednesday’s] “We’re as on board with the inflation report as anybody, but I think it would take something really atypical to change the Fed’s tone from 1) focusing on work and 2) seriously thinking about cutting in September,” Porcelli said. “They should start aggressively. I can easily argue that the Fed should cut 50 basis points just to start, because I think they should have already been cutting. I don’t think that’s what they’re going to do. They’re going to start modestly.”