To borrow the title of a famous R.E.M. song: It’s the end of the Federal Reserve’s rate tightening cycle as we know it (and investors feel fine).

The consumer price index (CPI) in June declined to its lowest annual rate in more than two years, beating expectations at both the headline and core levels.

The takeaway: The stock market rally just got more fuel, because the Fed’s aggressive tightening cycle, as we’ve known it since March 2022, is getting closer to the end.

The U.S. Bureau of Labor Statistics reported Wednesday that the CPI last month rose 3% from a year ago, which is the lowest level since March 2021. On a monthly basis, the CPI rose 0.2%. Those numbers compared to consensus estimates for increases of 3.1% and 0.3%, respectively.

Excluding volatile food and energy prices, core CPI rose 4.8% from a year ago and 0.2% on a monthly basis. Consensus estimates expected increases of 5% and 0.3%, respectively.

The following chart breaks down the story of inflation’s deceleration:

Important CPI core components showed significant slowing. The shelter index in June increased 0.4% over the month after rising 0.6% in May. The index for lodging away from home fell 2.0% in June following an increase of 1.8% in May.

In the wake of the new and encouraging inflation data, the main U.S. stock market indices closed sharply higher Wednesday as follows:

• DJIA: +0.25%
• S&P 500: +0.74
• NASDAQ: +1.15%
• Russell 2000: +1.05%

Treasury yields moved lower. Also cheering investors Wednesday was release of the Fed Beige Book, which gauges economic conditions around the country. The data showed that the economy is still growing, but at a slower pace. Wages continued to rise, but more moderately.

This week ahead of the CPI report, we’ve gotten data that further underscores the disinflation narrative. The Manheim Used Vehicle Value Index, released July 10, fell 4.2% in June from the previous month and 10.3% from a year ago. That represented the biggest monthly drop since the early onset of the coronavirus pandemic.

What’s more, the New York Fed’s consumer survey (also released July 10) revealed that inflation expectations continued falling, with the one-year expectation declining to 3.8%, the lowest reading since April 2021. That’s important, because inflation expectations often become self-fulfilling.

Nonetheless, the Federal Reserve tends to focus on core CPI, which continues to run hotter than the central bank’s target of 2%. We shouldn’t expect another “pause” in interest rates when the Fed holds its next policy-making meeting July 25-26. But the days of big rate hikes are definitely over for the duration of 2023, and a cut is increasingly possible in 2024.

The producer price index (PPI), scheduled for release tomorrow, also is expected to show cooling prices. The PPI measures prices at the wholesale level.

Fed Chair Jerome Powell and his cohorts just might pull off a “soft landing,” a term that means curbing inflation by hiking rates but without wrecking the economy. History shows that such feats are rare, but not impossible.

WATCH THIS VIDEO: The Market Catches its Breath

As I look toward 2024, I envision an improved inflation situation, a Fed that will likely have paused rate hikes and is perhaps considering rate cuts, and an economy that’s emerging from a mild downturn. That’s a superb backdrop for investment opportunity, in both stocks and bonds.

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John Persinos is the editorial director of Investing Daily.

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