This Friday could see some significant movement in U.S. financial markets. That's because on Friday morning, Feb. 20, at 8:30 a.m. ET, the Bureau of Economic Analysis (BEA) will publish the Fed's preferred measure of inflation, the Personal Consumption Expenditure Price Index.
It's a data point well worth monitoring, because the Federal Reserve will be watching it extremely closely. It could set the tone for monetary policy for the rest of 2026, and it could move markets.
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While many investors pay more attention to the Consumer Price Index (CPI), and it tends to get more media attention, the Fed actually prefers the PCE Price Index. According to the Cleveland Fed, that's because "the PCE price index offers a broader and more comprehensive measure of inflation and more quickly picks up adjustments in consumers' choices in response to price changes."
For those reasons, the Fed's 2% target for the annual inflation rate is based on the PCE Price Index, not the CPI.
One recent measure of inflation says it's moderating
The CPI is still important. Last Friday, we got a better-than-expected reading from that inflation measure. Consumer prices rose 2.4% (on an annual basis) in January, while economists had expected them to rise 2.5% over a year ago. Taking out volatile food and energy prices, the Consumer Price Index was up 2.5%, the lowest level since April 2021. The market opened higher that day due to the CPI data.
If the PCE Price Index confirms that inflation has moderated in recent months, which many analysts expect, it would confirm the CPI report. That would mean that after many months of remaining stubbornly above the Fed's target level, inflation is finally starting to move down again toward it.
That would give the Fed leeway to make additional cuts to its benchmark interest rate this year. Right now, the futures market is pricing in two quarter-percentage point cuts in 2026. But it's slowly moving toward three cuts, due to last Friday's CPI report and comments from some Fed officials that additional rate cuts are increasingly possible this year.
In fact, this week, Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said there may be potential for additional rate cuts this year.
Lower rates -- or just the possibility of them -- would be a big shot in the arm for the stock market. Expectations of easier borrowing create optimism that companies will be able to both cut their interest expenses and borrow more to grow, while more favorable financing for consumers should boost their spending.
So watch the PCE Price Index on Friday, about an hour before market open. It could tell you which way the market will go that day.
