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Fears of a stock market crash are swirling ahead of next week’s crucial Consumer Price Index () report due Tuesday, Feb. 13. Wall Street is keeping a close eye on the inflation reading to glean some insight into the Federal Reserve’s rate-cut schedule.
What do you need to know about the first inflation report of the new year?
Well, economists are crossing their fingers that prices continued to ease in January, reinforcing the notion that the battle against inflation is on its way to a smooth resolution.
If you recall, the December CPI, as of this morning’s revision, showed prices climbed just 0.3% in December, reflecting annual inflation of 3.4%. Core inflation, which ignores volatile categories like food and energy, climbed 3.9% in the final month of 2023.
Interestingly, the CPI came in notably higher than the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) report. Indeed, the December PCE came in at just 2.6%, with core inflation reading 2.9%.
In general, inflation reports have been on something of a winning streak for the past few months, across both gauges. That’s a point that Fed Chair Jerome Powell repeatedly acknowledged at the January policy meeting.
“We’ve got six months of good inflation data and an expectation that there’s more to come,” Powell said. “So this is a good situation. Let’s be honest. This is a good economy.”
However, Powell also iterated that central bank officials simply want to see more “good data.”
“It’s not that we’re looking for better data — it’s just that we’re looking for a continuation of the good data that we’ve been getting,” he said. “We just need to see more.”
Will the CPI Result in a Stock Market Crash?
While stocks have enjoyed a strong start to the year with the S&P 500 trending at its highest level ever, there remains some uncertainty in the air.
When its comes down to it, interest rates are the name of the game. Should the CPI report show that inflation is slowing, investors will likely read it as an indicator that the Fed has greater cause to begin lowering rates, potential cause for a rally. On the flip side, if the report shows inflation as stubborn — or worse, deteriorating — investors will price in “higher for longer” interest rates. That would be a downright bearish indicator for equities.
Higher interest rates tend to impede economic growth in the form of higher unemployment and reduced consumer spending. As such, investors everywhere have been crossing their fingers that inflation will ease enough to lower rates from their current, restrictive level.
Powell has already confirmed that the central bank plans to cut rates three or more times in 2024. Investors remain anxious over exactly when that will be, however. Next week’s inflation report should shine some light on the matter.
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 InvestorPlace.com Publishing Guidelines.