Why inflation is making stock market investors bullish

The market rally stalled a bit off the back of hotter-than-expected inflation data. But investors aren't panicking.Why it matters: Investors see the price pressures as proof that consumers can handle more — and that companies can cash in. Time to buy.What they're saying: "Producers have increased prices above costs, which means they have room to pass on the costs of tariffs down to buyers," Neil Dutta, head of economics at Renaissance Macro Research, wrote in a research note.For investors, this could be viewed as bearish, because it could fuel inflation and make it harder for the Federal Reserve to cut interest rates.Or it's bullish, because consumers can stomach the inflation, which would allow for higher profits.Between the lines: Right now, investors are betting on the bullish read.Over 92% of investors still expect the Fed to cut interest rates a quarter point this September, down from 99.9% before Thursday's hot inflation print.Meanwhile, the Producer Price Index showed evidence that companies are passing tariff-driven increases to consumers, a boon for their earnings. Yes, but: A big driver of record highs earlier this week was faith in near-term rate cuts."There is a good reason for an insurance cut, given the slowing jobs market, but it will be hard for the [Fed] to go further right now," Dutta wrote. And if inflation runs hotter still, it'll be tougher for the Fed to justify cuts, even if markets keep pricing them in.Zoom out: Longer term, investors see companies getting a boost from the "one big beautiful bill." That, coupled with the productivity gains expected from AI, could blunt inflationary pressures."AI will pay for tariffs," said Scott Ladner, chief investment officer at Horizon Investments, arguing that the money saved by companies using AI will outweigh extra costs that could come from levies.The bottom line: Only the stock market of 2025 could cheer inflation while shrugging at the idea of higher-for-longer rates.

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