The Federal Reserve’s preferred measure of inflation is set to show Thursday that price increases are continuing to lose steam. The severity of the drop could determine the next stage of a stock-market rally driven by hopes the Fed will pivot on monetary policy in early 2024.
The core personal-consumption expenditures (PCE) index, or core PCE deflator, is expected to have risen 3.5% in October, down from a 3.7% increase in September, based on a survey of economists by FactSet. Headline PCE inflation, which includes the volatile food and energy prices that core PCE strips out, is expected to have risen 3.1% in October, down from a 3.4% increase in September.
Core and headline PCE at those levels would mark the lowest inflation prints since spring 2021. That would be reason for celebration, and the latest encouraging sign that price-growth is getting closer to the Fed’s 2% target—20 months after the central bank began a generational campaign of interest-rate hikes in March 2022.
The releases, due at 8:30 a.m. Eastern on Thursday, will meet a stock market that has been marching higher thanks to optimism that waning inflation will stop the Fed from raising borrowing costs any further. The
S&P 500
advanced 8.1% in the month to Thanksgiving, its best performance in that period since 1999, as investors took heed of inflation data and began bracing for rate cuts next year. The dollar, meanwhile, has weakened to a three-month low as traders see rates falling significantly.
PCE inflation readings are always important to investors and the Fed, but the timing of this release makes it particularly important. This is the last PCE print as well as the last major inflation indicator before the Fed’s next two-day monetary policy meeting begins on Dec. 12; readings of the consumer price index (CPI) and producer price index (PPI) are due Dec. 12 and 13, respectively.
Traders increasingly expect the Fed to strike a more dovish tone as markets move to price in as many as seven rate cuts next year, according to the CME FedWatch Tool. The odds that rates are lowered at the Fed’s March policy meeting rose above 50% on Wednesday, up from below 35% on Tuesday, while the odds of a rate cut by May now sit above 80%, also up significantly from the day prior.
As rate expectations continue to shift rapidly, and the stock market rallies in turn, this latest batch of inflation data will advance the narrative, perhaps fueling more gains—or knock stocks down a peg.
Write to Jack Denton at jack.denton@barrons.com
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