Inflation Alert: Will the Aug. 31 PCE Report Trigger a Stock Market Crash?

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Stock market crash fears are stoked ahead of this week’s Personal Consumption Expenditures (PCE) index report due Thursday, Aug. 31. The Federal Reserve’s preferred inflation gauge should offer some insight into the central bank’s monetary policy trajectory heading further into the rest of the year.

So, why are investors so worked up about the July PCE?

Well, in a week full of pertinent economic data releases, the PCE may well be the most important. Not for nothing, the Fed hasn’t been shy in stating the significance the inflation measure holds in its decision-making process. Reasonably so, the Fed’s historic rate-cycle campaign for the past year and a half or so has been a targeted attack on inflation, which the PCE arguably measures better than its closest alternative, the Consumer Price Index (CPI).

With the Fed maintaining that it will wait for more economic data before making any further rate-hike decisions, this week’s PCE has some added weight on its shoulders. Depending on the results, expect equity markets to price in higher lending rates or an extended pause on rate hikes.

Fortunately, prices have generally been on the decline this year. This week’s PCE, for July, will be the follow-up to — you guessed it — the June PCE. That report recorded a 3% annual increase, the lowest level in more than two years and less than half the 6.9% reading from last June.

That isn’t to say the June PCE was all peaches and cream. Core PCE, which excludes volatile categories like Food and Energy, rose 4.1% from last year, an undeniable improvement from May’s 4.6% pace but well above the Fed’s long-standing 2% inflation goal.

Will Fed Raise Rates Again?

Last month’s report came just days after the Fed announced the most recent 25 basis-point rate hike, the 11th rate increase since March 2022. At the time, Fed Chairman Jerome Powell emphasized that future policy decisions would be based on incoming economic data.

With the next Federal Open Market Committee (FOMC) meeting scheduled for Sept. 19 to Sept. 20, the PCE will offer economists the clearest idea of what to expect. Should inflation — especially core inflation — continue to ease, expect the Fed to consider another pause. On the flip side, if prices prove stagnant or they increase, the Fed may well move forward with another 25 basis-point rate increase.

A number of Fed economists have come out of the woodwork in recent weeks, sharing the opinion that more rate hikes may be necessary to get prices down to acceptable levels. This includes Boston Fed President Susan Collins, who recently hinted at a pause in the future but expressed uncertainty over whether rates are high enough to consider a hiatus.

“I do think it’s extremely likely that we will need to hold for a substantial amount of time but exactly where the peak is, I would not signal right at this point,” Collins said. “We may be near but we may need to increase a little bit further.”

Powell himself iterated a similar sentiment at a July press conference:

“Policy has not been restrictive for long enough to have its full desired effects […] So we intend to keep policy restrictive until we’re confident that inflation is coming down sustainably to our 2% target, and we’re prepared to further tighten if that is appropriate.”

Will the PCE Report Prompt a Stock Market Crash?

Equity markets have been particularly sensitive to macroeconomic data recently, for good reason. When rates rise, industries suffer across the board. Many of the highly leveraged tech and growth stocks that make up the Nasdaq Composite especially stand to lose big when rates climb.

Just last week, stocks took a steep tumble after Collins’ hawkish suggestion. That came despite even Nvidia’s (NASDAQ:NVDA) blowout earnings report, possibly the most-anticipated earnings call all quarter.

As such, regardless of the outcome of the PCE, expect a reaction from investors one way or another on Thursday.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

With degrees in economics and journalism, Shrey Dua leverages his ample experience in media and reporting to contribute well-informed articles covering everything from financial regulation and the electric vehicle industry to the housing market and monetary policy. Shrey’s articles have featured in the likes of Morning Brew, Real Clear Markets, the Downline Podcast, and more.

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