It was a day stock market pros have been sweating to see and hoping the latest inflation news from the US was going to be music to their ears. But it turned out to be a hot August fright! Stocks are set to be rocked until the September Consumer Price Index (CPI) is put on show in October.

For the record, headline inflation rose 0.1% month-over-month, even with falling gas prices. Core inflation rose 0.6% month-over-month, but on a year-over-year basis, inflation was 8.3%, compared to 8.5% a month ago. It was a fall but not a significant one.

That monthly rise was the heartbreaker for the market.

To recap, stock markets have edged up lately on the expectation/hope that the US August inflation number would show a reasonable fall, but the figures disappointed. A good number would have justified the market’s positivity to buy stocks on the basis that the Federal Reserve would conceivably be likely to stop these jumbo 0.75% interest rate rises to the official rate.

In simple terms, the story goes like this: If inflation is falling, then interest rate rises would soon end, and that’s great for stocks, so buy stocks!

However, the CPI numbers were too hot and not showing that the fires stoking up high inflation were starting to cool. So it’s bad news for stocks until the average price level in the US starts to fall convincingly.

“The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes,” said Matt Peron, director of research at Janus Henderson Investors to CNBC. “It also pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term. As we have cautioned over the past months, we are not out of the woods yet and would maintain a defensive posture with equity and sector allocations.”

The inflation number came out an hour or so ago and the Dow Jones was off 589 points, the S&P 500 gave up 2.2%, while the tech-heavy Nasdaq slumped 3%.

This will be a bad day for local stocks and delays the overall bounce-back for the share market that I’ve been tipping will happen in the December quarter, which clearly starts next month.

What this means is that the market focus will go to the September reading of the CPI on October 13. If that disappoints, it could be a big problem for stocks. On the other hand, if we see an overdue fall in inflation, it could be the start of something great for hopeful stock players.

Is this a chance? As an economist, I know you can’t rely on statistics to deliver when you want them to because there are lags and other gremlins that mean they don’t actually tell you the right story.

But is this relevant to this US inflation story now?

The chart below makes me say ‘yes’. This is the Pipeline Inflation Indicator from the economics team at AMP which says there’s a reasonable case for believing inflation can fall sometime soon.

“Fortunately, our Pipeline Inflation Indicator is continuing to decline and should take pressure off central banks (the Fed initially) and allow a slowing in tightening in the next six months – hopefully in time to avoid deep recessions,” Shane Oliver wrote recently. “South Korea has now joined the US in looking like its inflation rate has peaked.”

The black line shows us what indicators are saying about inflation, while the red line tells us what the official statistics say. Hopefully, the official CPI will follow the pipeline numbers.

Meanwhile, Fundstrat’s MD, Tom Lee, who’s a very good predictor, thinks US inflation has peaked and is close to showing a decent drop. Let’s hope his analysis is on the money. A week ago on CNBC, he argued that “inflation could be falling faster than expected” but he was wrong for August. Will he get it right for September?

This ‘hot August fright’ number for the market needs to be a lot cooler for the September reading on October 13 for stocks to get on a solid upswing.