July's slightly cooler-than-expected consumer price report could signal inflation is peaking, but it does not yet change the outlook for an aggressive Federal Reserve. Stocks surged on the report that the July consumer price index rose 8.5% from a year ago, less than the 8.7% expected and well off June's 9.1% level. According to Dow Jones, economists had expected a 0.2% monthly gain for July but that number was unchanged instead. "On headline inflation, I wouldn't be surprised if that was the highest year-over-year reading," said Mike Pugliese, economist at Wells Fargo, referring to June's 9.1% reading. Pugliese said there is still a chance core inflation could ratchet up, since it is driven heavily by housing and services inflation. Excluding food and energy prices, core CPI rose 5.9% annually in July, and 0.3% monthly, compared with estimates of 6.1% and 0.5%, respectively. "It's a welcome first step, but I don't think it's much more than that," said Pugliese. One improved inflation report will not be what determines whether the Fed will raise a half percent or three-quarters of a percent, since inflation data has surprised on the upside in prior months, he said. "This next CPI print becomes really important. If a lot of this miss gets reversed in August CPI, that puts the Fed in a much tougher spot," he said. August CPI is released Sept. 13, and the Fed's policy board next meets on Sept. 20-21. With stocks rallying hard on the report, Treasury yields fell as traders bet the Fed might be less likely to proceed with another three-quarter point rate hike next month. The Fed raised rates by 0.75 of a percentage point in both June and July. Many economists expect the Fed to begin to ease up its rate hiking after the next meeting, following up with quarter point hikes thereafter. But the debate about whether the central bank raises a half percent or three-quarters of a percent heated up after July's employment report last Friday showed 528,000 jobs were created, more than double expectations. Prior to the CPI report, fed funds futures were pricing in odds of about 73% for a three-quarter point hike, but that quickly fell to 42%, according to Randy Frederick, managing director, trading and derivatives at the Schwab Center for Financial Research. "That means there's still a 100% probability at this time of a 50 basis point hike, which I think is right," Frederick said. "Obviously that could change if we have a hot PPI tomorrow that can send the market in another direction...There's plenty of time for things to change." The producer price index is reported Thursday. The market and the Fed are now waiting for more data that could help determine whether the Fed will raise interest rates by 50 basis points or 75 basis points in September. "I still think the Federal Reserve is on for 75 basis points….They need to see much more improvement than this sustained, especially in the core. We could be looking at slower moves by the end of the year," said Diane Swonk , chief economist KPMG. Headline inflation was affected by a decline in energy prices of 4.6%, and gasoline was down 7.7%. Food continued to rise, up 1.1% on the month. "The good news is we got a bigger drop down in energy prices, a little bit more than expected and some spillover into some other areas, like transportation services," Swonk said. Swonk said a strong labor market is one thing that could keep the Fed on course for a heftier hike. "The labor market is still very robust and they're worried about the cost pressures," she said Housing costs in July rose 0.5%, slower than the recent pace of 0.6%. But that is an area where economists expect to see more upside pressure that could influence core inflation. "Housing and shelter is the biggest one. You're still kind of accelerating on a year-over-year basis," said Pugliese. "Shelter is a good example. It's so big and there's a lag between market rents for example, and when it shows up in CPI."