NEW YORK, May 14 Reuters Investors newfound optimism on the U.S. economy faces an important test on Wednesday, with consumer price data set to show whether the soft landing hopes that have fueled recent gains in equities are justified.

Investors resurgent appetite for equities has driven the SP 500 back near record highs. Meanwhile, eyepopping rallies in shares of GameStop GME.N and other socalled meme stocks suggests that risktakers are riding high in more speculative corners of the market.

In options markets, the Cboe Volatility Index, known as Wall Streets fear gauge because it shows demand for protection against stock swings, stood near its lowest level in about two months on Tuesday.

Many of those moves have been driven by rekindled hopes that the Federal Reserve can pull off an economic soft landing, where it is able to cool inflation without badly hurting growth and eventually transition to cutting interest rates.

Still, while Fed Chairman Jerome Powell has downplayed the potential for rate hikes this year and recent data showed cooling in the labor market, the soft landing scenario is by no means a foregone conclusion.

Another strongerthanexpected inflation reading on Wednesday could spark more worries that a toohot economy will force the Fed to raise rates again, throwing cold water on investors recent optimism and undercutting the case for more gains in stocks and bonds.

It39;s a pretty critical shortterm report, said Keith Lerner, cochief investment…