The Fed's Preferred Inflation Measure Is Due Friday: Why It Could Send Shockwaves Across Markets

The SPDR S&P 500 SPY has been trending lower this week as new data continues to suggest that a more hawkish Federal Reserve could be preparing to swoop in and stifle markets. The central bank's preferred inflation measure will drop Friday in what could be a pivotal report for investor sentiment.

What To Know: The Bureau of Economic Analysis is set to release Personal Consumption Expenditures (PCE) price index data for January at 8:30 a.m. ET Friday. 

PCE data is the Fed's preferred inflation gauge. It's released on a monthly basis and shows changes in the prices of goods and services purchased by consumers in the U.S. 

Last month, the bureau reported a 5% increase in PCE for December. The data was down from 5.5% in November and came in below economist estimates of 5.5%. Core PCE came in up 4.4% in December, in line with estimates.

Why It Matters: Although inflation readings continue to show declines on a year-over-year basis, many experts believe inflation is not coming down fast enough for the Fed to ease its stance. 

Earlier this month, the Labor Department reported a 6.4% rise in CPI for January, down from 6.5% in December, but above economist estimates of 6.2%.

Thursday morning, the Bureau of Economic Analysis said U.S. gross domestic product (GDP) increased by an estimated 2.7% in the fourth quarter versus estimates for a 2.9% jump.

The Labor Department also reported jobless claims of 192,000 for the week ending Feb. 18, which was below average economist estimates of 200,000. The continued strength in the labor market is another sign the Fed will continue to be aggressive in its fight against inflation.

The likelihood the Fed will opt for a 0.5% hike at its upcoming meeting in March continues to climb. The bond market is currently projecting a 73% chance of a 0.25% hike and a 27% chance of a 0.5% hike, according to CME Group data. This is up from a less than 10% chance of a 0.5% hike before CPI data was released.

Minutes from the Fed's last meeting showed that a few participants were in favor of a 0.5% hike in January.

"With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high," the minutes said.

Related Link: Fed Minutes Show A 'Few' Participants Favored 0.5% Hike, Inflation Still Remains 'Unacceptably High'

Hotter-than-expected PCE data could further increase the chances of a more aggressive rate hike at the Fed's next meeting. Economists are anticipating a 4.3% year-over-year increase in Core PCE for January, according to Benzinga Pro.

SPY Price Action: The SPY was up 0.61% at $400.99 at the time of publication. Friday's PCE data is likely to spark increased volatility one way or the other. 

Photo: Steve Buissinne from Pixabay.