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U.S. stock futures sold off on Tuesday after a surprising inflation report that showed prices firmer than expected in August.

Shortly after the report’s release at 8:30 a.m. ET, Nasdaq futures were down as much as 1.8%, S&P 500 futures were down 1.2%, and Dow futures were down 0.9%

The Bureau of Labor Statistics released its August Consumer Price Index (CPI) which showed prices rose 8.3% over the prior year and 0.1% over the prior month.

Economists had expected an 8.1% increase in inflation over last year and a decline of 0.1% over the prior month. This reading marks the second-straight moderation in prices from four-decade highs reached earlier this year, but with a smaller-than-expected decline investors now expect the Federal Reserve to raise interest rates by 0.75% at its policy meeting next week.

Market participants were largely anticipating policymakers will deliver a third consecutive 75 basis point interest rate hikes after weeks of hawkish messaging from members of the U.S. central bank. Tuesday’s data likely seals the deal for next week’s decision.

“Last month’s milder-than-expected inflation readings may have fueled hopes the Fed would hike rates less aggressively, but Powell has been clear that the bank won’t stop until the job is done,” Chris Larkin, managing director of trading at Morgan Stanley’s E*TRADE said in a note.

U.S. Federal Reserve Board Chairman Jerome Powell waits for his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022. Brendan Smialowski/Pool via REUTERS

“And with market expectations of a less aggressive Fed moderated, investors may focus on other challenges the market faces, such as unrealistically high earnings estimates, and headwinds posed by an extremely strong US dollar.”

Peloton (PTON) was in the spotlight early Tuesday on the heels of an announcement Monday afternoon that co-founder John Foley is stepping away from the board of directors, months after Peloton hired former Spotify exec Barry McCarthy as CEO. Shares slipped roughly 2% ahead of the open.

Elsewhere, shares of Rent the Runway (RENT) tanked nearly 25% in pre-market trading Tuesday after the company trimmed its full-year guidance and unveiled plans to cut 24% of its corporate workforce, citing “potentially rougher macro conditions.”

“Once we get past this week’s CPI and PPI inflation reports and next week’s FOMC meeting, the next major market catalyst will be Q3 earnings,” DataTrek’s Nicholas Colas said in a note.

According to data from FactSet Research, earnings growth expectations for the S&P 500 stand at an increase of 3.7% for the third quarter, down sharply from expectations of 9.8% growth at the end of June.

Colas points out that analysts have cut Q3 earnings expectations over the last 2-3 months for every sector in the index except energy, and seven out of 11 groups are now expected to show outright year-over-year declines in earnings, compared to only three in the second quarter.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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