Wall Street Hits Pause Button Ahead of Big Inflation Test

US stocks kicked off the week with a cautious shuffle rather than a sprint, as investors kept one eye on record-high territory and the other on the government’s upcoming inflation report — a data drop that could steer the Federal Reserve’s next big move.

By midday Monday, the Dow Jones Industrial Average was down about 81 points, or 0.2%, while the S&P 500 inched up 0.1% and the Nasdaq Composite gained 0.3%. The market’s muted mood comes with the S&P and Nasdaq still hovering near record levels, but momentum is fragile as traders wait to see if inflation is cooling — or making an unwelcome comeback.

The marquee event arrives Tuesday: the release of July’s consumer price index. Economists expect the CPI to show prices were 2.8% higher than a year ago, slightly hotter than June’s 2.7%. On Thursday, the producer price index will offer another look at the inflation pipeline. Both reports are landing just weeks before the Fed’s Sept. 17-18 policy meeting, and could shape whether the central bank cuts interest rates — a move markets are currently pricing in with nearly 87% certainty, according to CME FedWatch data.

“This is the most important thing for markets right now,” said Jay Woods, chief global strategist at Freedom Capital Markets. “The CPI will definitely dictate the Fed’s thinking.”

The stakes are high because the inflation data comes ahead of the Fed’s annual Jackson Hole meeting in Wyoming later this month, where central bankers often telegraph major policy shifts. CFRA Research’s Sam Stovall warned that traders betting heavily on rate cuts could be in for a letdown if inflation proves stubborn.

“If the consumer keeps spending and inflation stays sticky, the Fed might not see a need to cut,” he said.

Last week, stocks staged a comeback from a steep sell-off triggered by a weak jobs report, with the Nasdaq closing at new highs and the S&P brushing against another milestone. But some market watchers think the rally could stall here. With valuations stretched, geopolitical tensions simmering, and seasonal volatility historically rising in late summer, a “digestion phase” — or even a pullback — wouldn’t surprise anyone.

“Sideways trading wouldn’t be a bad thing,” Woods added.

In the meantime, corporate news kept traders busy. Hershey’s stock slid 5% after cocoa futures spiked 10% to their highest price since early July. Cannabis stocks soared after reports that President Donald Trump is weighing reclassifying marijuana to a lower-risk category under federal law. Nvidia and AMD shares edged higher after confirming an unusual deal to share 15% of China chip-sale revenues with the US government in exchange for export licenses.

And in the background, UBS nudged its year-end 2025 S&P 500 target down to 6,100 from 5,500, predicting a dip before a recovery in the second half of 2026.

With the CPI looming, traders seem unwilling to push indexes much higher without more clarity. If Tuesday’s inflation number comes in cooler than expected, the rally could get new fuel. If it’s hot, Wall Street’s record run may be due for a reality check.

With input from CNBC, the Associated Press, and USA Today.