updated 8/17/2006 9:41:12 AM ET 2006-08-17T13:41:12

Investors pushed stocks to three-month highs Wednesday after the Labor Department reported tame inflation figures for the second straight day, boosting Wall Street’s confidence that the Federal Reserve would keep interest rates steady. Falling crude futures, which slid below $72 per barrel, also fed the gains.

Major Market Indices

The consumer price index, which measures price increases at the retail level, rose 0.4 percent in July, slightly higher than June’s 0.2 percent increase. But with food and fuel prices removed, so-called “core” CPI rose just 0.2 percent, less than the 0.3 percent economists expected.

Combined with Tuesday’s producer price index, which showed a decline in core wholesale prices, the data points to a drop in inflation pressures. That would allow the Fed to stop raising rates, which would otherwise threaten economic growth and cramp corporate profits.

“The Fed could not have written these numbers any better to make their case on the economy,” said Jack Ablin, chief investment officer at Harris Private Bank. “This, I think, could really help the markets start to move forward.”

At the close of trading, the Dow Jones industrial average rose 96.86, or 0.86 percent, to 11,327.12, its highest level since May 17.

Broader stock indicators also advanced. The Standard & Poor’s 500 index added 9.85, or 0.77 percent, to 1,295.43, and the Nasdaq composite index gained 34.53, or 1.63 percent, to 2,149.54. Both indexes were at their highest point since mid-May.

Bonds gained on the good inflation news, with the yield on the benchmark falling to 4.87 percent from 4.93 percent late Tuesday. The dollar lost ground against other major currencies, while gold prices rose.

Crude oil futures slipped for the second straight session as tensions in the Middle East continued to cool. A barrel of light crude was quoted at $71.89, down $1.16, on the New York Mercantile Exchange.

The housing market showed more signs of slowing, which could also motivate the Fed to maintain its current position on rates. Housing starts fell to an annualized rate of 1.795 million in July, down from 1.85 million in June. The number of building permits issued likewise fell.

The slowing economy and steady prices are good for stocks, but traders are watching closely to see whether the rally has staying power. Quincy Krosby, chief investment strategist for The Hartford, said the S&P 500’s inability this summer to stay above the 1,280 level — a key number for market strategists — has shown some remaining hesitance on the part of investors.

“If we can see the market hold here and then build out, then that may be the beginning of a longer rally,” Krosby said. “It really depends on whether this slowing economy affects earnings or not, and we’ll have to wait and see for that.”

In earnings news, cosmetics maker Estee Lauder Cos. Inc. saw its fiscal fourth-quarter profits slid 33 percent on one-time charges related to cost cutting and a tax settlement, but the company nonetheless beat Wall Street profit forecasts by a penny per share.

Shares of Bulk discount retailer Big Lots Inc. gained after posting a second-quarter profit versus a year-ago loss and raising its forecasts for full-year profits. Analysts expected the company to post another loss.

Clothing retailer Abercrombie & Fitch Co. said its quarterly profits climb 14 percent on strong sales of its surfer-related clothes. Abercrombie shares jumped $7.88 to $63.40 on the news.

Overseas, Japan’s Nikkei stock average surged 1.61 percent. In Europe, Britain’s FTSE 100 closed down 0.02 percent, France’s CAC-40 rose 0.44 percent for the session and Germany’s DAX index gained 0.63 percent in late trading.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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