US stocks are uneasy about inflation, there may be a storm tonight!

The U.S. stock market has experienced turbulence once again. On Wednesday, U.S. stock indexes fell, with the Dow Jones Industrial Average dropping as much as 600 basis points in early trading, as traders had mixed feelings about inflation data.

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

Investors are alarmed by the higher-than-expected data. This suggests that inflation is stubborn enough that a 50 basis point rate cut is unlikely at the next Federal Reserve policy meeting, which some investors had eagerly anticipated.

Following the release of CPI data, based on the CME Group's FedWatch tool, the market now expects a 83% probability of a 25 basis point rate cut by the Federal Reserve 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 slightly awkward data point." He also added that the latest data shows core and service inflation appearing "resilient and unconquered."

He later added, "However, the case for a comprehensive 0.5% rate cut seems less compelling. Furthermore, the Fed's dual mandate means it cannot base its aggressive rate cuts or any rate cuts solely on the weakness in the labor market."

While the market may be disappointed with the dim prospects of a significant rate cut, a 50 basis point rate cut by the Federal Reserve could be a double-edged sword. Analysts have pointed out in recent weeks that a 50 basis point rate cut could raise concerns in the market about the Fed's worries about a significant economic slowdown. On the other hand, a 25 basis point rate cut would mean that interest rates would remain at higher levels for a longer period.

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

"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 expectations for a 25 basis point rate cut next week, with the possibility of a 50 basis point rate cut no longer existing," she added.

The Labor Department stated that housing costs were a major factor driving inflation, noting that housing inflation rose by 0.5% in August.

However, Preston Caldwell, U.S. economist at Morningstar, indicated that with estimated market rent growth of about 2% year-on-year, housing costs may soon decline.

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

Even after adjusting their expectations, the market still expects the Federal Reserve to moderately cut rates by the end of this year. Investors see an 84% probability of a 100 basis point or more rate cut by the Fed by December, but future rate cuts will continue to depend on employment and inflation data Chris Zacarelli, Chief Investment Officer of Independent Advisor Alliance, stated in a declaration: "If the economy continues to slow down - rather than suddenly entering a recession - the Federal Reserve will be able to cut interest rates at a pace of 25 basis points per meeting."

He added: "Given the current situation of Fed rate cuts, unemployment near multi-decade lows, and an expanding (though slowing) economy, once we get through the volatility leading up to most of the presidential elections, the market should be able to reach historical highs again."