The consumer price index (CPI), a key measure of inflation, rose at annual pace of 7.7 per cent in September.
That was below analyst expectations and a dip from the 8.2 per cent rate in September.
The dollar plunged against the euro, pound and yen after the data was released, and US treasury bond yields also dropped.
European stocks, which had been lower in midday trading, shot higher.
Frankfurt stocks were up 2.9 per cent in afternoon trading as Wall Street open, with Paris 1.6 per cent higher and London rising 0.8 per cent.
US stock futures also rocketed after the data was published, and at the opening bell the Dow jumped 2.5 per cent higher.
The S&P 500 sprang up 3.7 per cent and Nasdaq Composite soared 4.8 per cent.
“Inflation has finally started to drop like a rock in the US and this is the best news that anyone can expect,” said AvaTrade analyst Naeem Aslam.
“The Fed will still continue to increase the interest rate but there is no need to be aggressive about this – which means that the pace of interest rate hikes will slow down now.”
The Fed’s main policy rate currently stands at between 3.75 to 4 per cent, and investors have been keen on determining when policymakers will “pivot” away from aggressive hikes or “pause” them altogether.
Stuart Clark, portfolio manager at Quilter Investors, said the slowdown in inflation will provide some relief to consumers and investors, as well as “giving some momentum to the idea that the worst is now behind us”.
But we’re “not completely out of the woods yet,” he added, pointing food and housing costs continue to rise.
Clark said “the Federal Reserve is going to remain in a hawkish mood for some time to come … the market will have to wait for any indication of a pivot or pause from the central bank”.
COVID-19 AND CRYPTO
Markets are grappling also with the impact of strict zero-COVID measures in China, with supply chains and activity slowed by harsh lockdowns and testing policies.
“China’s domestic demand is weak and their key trading partners are entering recession territory,” said Edward Moya at OANDA trading group.
Oil prices extended recent losses on weaker Chinese demand.
The crypto world has meanwhile been rocked by a surprise decision from Binance, the world’s biggest cryptocurrency platform, to scrap a possible acquisition of rival FTX.com a day after disclosing it had signed a non-binding letter of intent to buy it.
The near-collapse of FTX has plunged bitcoin to a two-year low.
“FTX’s slump from over a US$32 billion valuation to zero in less than a few days raises numerous issues,” said Stephen Innes at SPI Asset Management.
“Prominent investors are wearing eggs on their faces after diving in head first.”
He added that gold and silver would be the biggest beneficiaries of the crypto fallout with investors looking to the trusted precious metals for stability.