Why Friday’s Inflation Report Is a Critical Reality Check for Investors

U.S. stocks have climbed back toward record levels after a volatile month, but investors remain uneasy as persistent inflation and weakening labor data cloud the outlook. That’s why Friday’s release of the September personal consumption expenditures (PCE) index — the Federal Reserve’s preferred inflation gauge — is being viewed as a major test of the market’s renewed optimism.

Despite rising equity prices, recession warnings from soft data such as consumer sentiment surveys and private payroll reports have kept sentiment mixed. Investors are hoping Friday’s delayed PCE report will provide the “hard data” clarity that has been missing.

Mark Hackett, chief market strategist at Nationwide, said investors are watching the PCE report more closely because many forward-looking indicators have been unreliable.

“There’s this confusion that the data we’re getting is lagged or incomplete,” Hackett said. “The PCE fills in the blanks because soft data measures have been problematic.”

Mixed Signals on the Economy

Recent indicators present a divided picture:

• Labor market data: Slower hiring and more workers looking for jobs, pointing to recession risks.

• Corporate earnings: Strong results from Dollar General and Macy’s show consumer spending remains resilient.

• Black Friday sales: Billions spent despite inflation concerns, suggesting consumer demand has not yet cracked.

This divergence has made Friday’s PCE report — along with personal income and spending data — “incredibly important,” Hackett said.

Any confirmation that consumers remain healthy could extend the year-end stock market rally.

What Economists Expect

Economists surveyed by the Wall Street Journal expect:

• Headline PCE (MoM): +0.3%

• Core PCE (MoM): +0.2%

• Headline PCE (YoY): 2.9% (unchanged)

• Core PCE (YoY): 2.8%

This would keep inflation well above the Fed’s 2% target — but not rising fast enough to deter policymakers from cutting rates next week.

Why the Fed May Cut Rates Despite Sticky Inflation

Fed-funds futures show an 87% chance of a quarter-point rate cut next Wednesday.

Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, said the central bank is likely to “look beyond” delayed inflation indicators because acting too slowly risks worsening labor-market weakness.

Janasiewicz expects inflation to remain “sticky” but not accelerate meaningfully.

“The demand side eases as the labor market cools, so you lose some of that upward pressure,” he said. “The risk is that inflation stays sticky, not that it moves sharply higher.”

Market Snapshot

By Thursday afternoon:

• S&P 500 hovered around 6,849 — just 0.5% below its record close.

• Dow Jones Industrial Average was nearly flat at 47,839.

• Nasdaq Composite traded near 23,467.

The market’s next major move now hinges on Friday’s inflation print.

Key Takeaways

• Investors are nervous despite stocks nearing record highs, as inflation and labor-market weakness raise doubts.

• Friday’s PCE report is seen as a critical reality check after mixed and unreliable soft data.

• Strong consumer spending contrasts with soft employment indicators, creating uncertainty.

• Economists expect PCE to remain elevated but stable, supporting the case for a Fed rate cut next week.

• Fed officials may prioritize labor-market risks over inflation that remains above target.

• Markets are directionless ahead of the data, with all major indexes trading near recent highs.