Lower prices for petrol and oil was responsible for much of last month’s inflation surprise. But even after ignoring that and volatile food prices, so-called “core inflation” held steady last month instead of accelerating as economists had forecast.

The data encouraged traders to scale back bets for how much the Fed will raise interest rates at its next meeting. They now see a hike of a half percentage point as the most likely outcome, according to CME Group. A day earlier, they were betting on a more aggressive hike of 0.75 percentage points, the same as the last two increases.

Such differences may not sound like much, but interest rates help set where prices go across financial markets. And higher rates tend to pull down prices for everything from stocks to commodities to crypto.

Prices for bonds soared immediately after the inflation report’s release, pulling their yields lower. The yield on the two-year Treasury, which tends to track expectations for the Fed, fell to 3.19 per cent from 3.27 per cent late Tuesday.

The 10-year yield initially fell, though stabilised later in trading. It edged higher to 2.79 per cent from 2.78 per cent late on Tuesday. It remains below the two-year yield and many investors see such a gap as a fairly reliable signal of a coming recession.

Recession worries have built as the highest inflation in 40 years squeezes households and corporations around the world. Wall Street is closely watching to see if the Fed can succeed in hitting the brakes on the economy and cooling inflation without veering into a recession.

“It’s a very knife-edge type of path that they are trying to tread here,” said Brian Nick, chief investment strategist at Nuveen.

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The Federal Reserve will get a few more highly anticipated reports before its next announcement on interest rates September 21, which could also alter its stance. Those include reports showing hiring trends across the economy due September 2 and the next update on consumer inflation coming on September 13.

More immediately, reports this week will show how inflation is doing at the wholesale level and whether U.S. households are still ratcheting down their expectations for coming inflation, an influential data point for Fed officials.