WASHINGTON (Sputnik) – US consumer prices rose by 8.5% in the year to July, retreating from four-decade highs, according to Labor Department data on Wednesday that signaled the Federal Reserve may have started making progress in its herculean fight against inflation.”The all items index increased 8.5 percent for the 12 months ending July, a smaller figure than the 9.1-percent increase for the period ending June,” the department said in a news release referring to the all-items reading in the Consumer Price Index (CPI).Economists polled by US media had expected an 8.7% growth in the annual CPI reading, versus the previous year-on-year growth of 9.1% in June. That June number was the highest for any annual inflation reading since 1981. For the current month itself, the CPI grew by zero, versus an expansion of 1.3% in June. Economists had projected a 0.2% month-on-month growth for July.After four increases since March that brought interest rates from nearly zero to as high as 2.5%, the Fed had been bewildered to see inflation barely budging from four-decade highs. The July CPI number was the first appreciable retreat in price pressures although the drop itself was just about 0.6% for the year.Money market traders immediately priced in a higher probability that the next Fed rate hike on September 21 would be for a 50-basis point, or half percentage point, increase than their previous bets for a 75-basis point, or three quarters of a percentage point, raise.US stocks, as well as prices of gold, jumped on the likelihood of the smaller rate hike in September.”This is the green light some equity bulls were looking for,” economist Adam Button wrote on ForexLive platform. “The implied odds of a 75 bps hike in September are down to 31% from 68% yesterday.”The CPI report will be one of the many data points that will be perused by the Fed over the next six to seven weeks as it determines how to proceed with an economy that has slipped into the technical definition of a recession from two straight quarters of negative gross domestic product growth.The CPI report aside, the Producer Price Index figures for July will be released on Thursday, along with the weekly report on initial jobless claims, while the University of Michigan consumer sentiment index will be published on Friday. These smaller data points could also help navigate the Fed in its decision-making on rates.On top of that, the Fed will have its Jackson Hole symposium in Wyoming from August 25 to 27 to debate at length on what to do with inflation and the economy. That will be followed by the US jobs report for August that will be published on September 2 — some 19 days before the next rate hike decision — and the August CPI report, which itself is due on September 13.The jobs market has been the juggernaut of the US economy, powering its comeback from the debilitating coronavirus pandemic of the past two years.But the strong labor market was one of the main drivers of inflation as wage pressure climbed without stop over the past 16 months.US unemployment reached a record high of 14.8% in April 2020, with the loss of some 20 million jobs after the COVID-19 breakout. Since then, hundreds of thousands of jobs have been added every month.The trend did not let up in July despite a negative 0.9% growth in second quarter gross domestic product, after a minus 1.6% in the first quarter that together accounted for a recession.The bigger contributor to inflation was fuel prices, with gasoline at US pumps hitting a record high of just above $5 a gallon in June. That has fallen to below $4 a gallon at many pumps now — a fact acknowledged by the July CPI report that showed gasoline contributing to a -7.7% growth to last month’s inflation versus 11.2% in June.