All three major stock indexes, the S&P 500, Nasdaq Composite, and Dow, soared to record highs on Wednesday following the release of data showing a cooling of inflation in April. The latest Consumer Price Index (CPI) indicated that prices rose by 3.4% for the 12 months ending in April, slightly lower than the 3.5% increase seen in the previous month.

The broad-market S&P 500 surged more than 1.2%, breaking the 5,300-level for the first time and closing at 5,308.15. The tech-heavy Nasdaq Composite jumped about 1.4%, setting a new record at 16,742.39. The blue-chip Dow climbed 350 points, or 0.9% and came close to the key 40,000-level, closing at 39,908. All three indexes are on track to finish the week with gains.

Investors interpreted the cooler inflation reading, along with a separate report indicating weak retail sales in April, as increasing the likelihood of interest rate cuts by the Federal Reserve later this year. Gary Pzegeo, head of fixed income at CIBC Private Wealth US, noted that the market is already pricing in a rate cut in September, with expectations of a second cut by December.

Wednesday's CPI report aligned with economists' expectations, providing a positive turn compared to the previously hot inflation reports in January, February, and March. Tyler Schipper, an economics professor at the University of St. Thomas, commented that it suggests those reports may have been bumps in the road rather than a stagnating inflation environment.

On a monthly basis, prices rose by 0.3%, a slower pace of growth than the 0.4% seen in the prior two months. Rising gasoline and shelter costs accounted for over 70% of the overall inflation increase in April, according to the Bureau of Labor Statistics' CPI report.

The report also brought some good news in the form of lower grocery prices, which fell by 0.2% from March. It also showed progress in core CPI, which excludes the more volatile categories of energy and food, slowing to 3.6%, its lowest rate since April 2021. Additionally, food price inflation held steady at 2.2% annually, while food away from home inflation decreased to 4.1%, the lowest rate since May 2021.

However, the report indicated that the prices of new and used cars continue to fall from record highs, though they still remain expensive to purchase and maintain. Motor vehicle insurance rose 1.8% in April and 22.6% annually. Apparel prices experienced a jump, with some categories, such as men's shirts and women's suits, increasing by nearly 3%.

Despite these fluctuations, April's report showed progress in reducing shelter inflation, which reached its lowest annual rate since May 2022 at 5.5%. Housing costs have been a persistent area of concern, but private sector sources of real estate data have indicated a cooling rental market, bringing some relief.

The Federal Reserve has been cautiously monitoring inflation before considering interest rate adjustments. In recent years, the central bank implemented a steady rate-hiking campaign to control surging demand and bring down high inflation levels. The moderation in inflation, coupled with softening retail sales, suggests that there may be less pressure on prices going forward, potentially having a continuing moderating effect on inflation.

Overall, the stock market's surge to new record highs reflects positive market sentiment in response to the eased inflation figures and the possibility of future rate cuts by the Federal Reserve.