Stocks closed near record highs on Wednesday, August 12, 2026, after July's inflation report came in mild.
Technology did the heavy lifting, flipping the Nasdaq 100 back into positive territory for the week after earlier losses.
The VIX, a measure of expected market turbulence, dropped to its lowest level since early January. A lower VIX means investors are less worried about sudden moves.
The reason for the brighter mood was July's CPI report, the main government reading on what consumers pay for everyday goods.
The report met expectations, and a key measure matched the slowest annual pace since March 2021.
That was enough to make investors rethink their bets on the Fed's next move. The inflation report landed after a cooler-than-expected jobs report, and together they took the edge off rate-hike fears.
A rate hike makes borrowing more expensive for businesses and consumers, which tends to weigh on stock prices.
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One analyst said the report supports a Fed hold but warned that a hike is still possible if data shifts.
The Federal Reserve has been trying to balance its dual mandate of maximum employment and price stability. With inflation cooling and the job market softening, the case for pausing rate hikes has strengthened. However, the central bank has repeatedly emphasized that its decisions depend on incoming data, and any surprise in either direction could shift the outlook.
The day's other clear winner was the AI trade. Fresh earnings from two AI names gave it a second wind.
"As seen in other AI-related earnings results, scarcity translates into pricing power", said Bloomberg Macro Strategist Michael Ball, meaning when supply is tight, the seller gets to charge more.
The AI sector has been a major driver of market gains this year, with companies involved in data centers and cloud computing seeing high demand. The recent earnings reports from Nebius and Coreweave illustrate how limited supply of AI infrastructure can lead to strong pricing power, which investors find attractive.
The next test comes Thursday with the release of PPI, a measure of wholesale prices. When businesses pay more for supplies, some of that cost eventually shows up in consumer prices.
It will help "get a better gauge of how this all passes into core PCE, the Fed's preferred inflation measure". Core PCE is the Fed's favorite gauge for underlying price trends.
If Thursday's data stays mild, it gives the central bank another reason to hold rates steady. A hotter number could rekindle the hike talk that Wednesday's data cooled.
There was also some late earnings news, but the market reaction reminded investors that good earnings news does not always move a stock the way they might hope.
Some strategists believe the report "may keep hawkish Fed officials at bay in September", but they remain cautious about inflation due to oil prices and the AI boom. The practical worry is that oil prices, already jumpy because of the Middle East conflict, could push inflation back up.
That is why one calm report is not the end of the inflation story, and why the Fed has not closed the door on another hike.
For your portfolio, one good inflation report does not settle everything. The Fed can still raise rates, oil prices can still spike, and AI stocks can still swing either way.
Thursday's PPI report is the next clue, and it will tell you which way the Fed is leaning. If wholesale prices stay cool, the case for a September hike gets even weaker, which tends to be good for your portfolio.
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