The next Personal Consumption Expenditure (PCE) inflation report, closely watched by the Federal Reserve, will be released at 8:30 a.m. ET Friday.

This highly anticipated inflation report will likely illuminate whether broad price pressures align with the Fed's 2% target or if they remain stickier than expected.

During last week's Jackson Hole Economic Symposium in Wyoming, Fed Chair Jerome Powell hinted at a potential rate cut, suggesting "the time has come for policy to adjust."

He expressed increased confidence that inflation is moving toward the Fed's target. Market traders are pricing in a rate cut at the Federal Open Market Committee meeting on Sept. 18. There's a 63.5% probability for a 25-basis-point cut and a 36.5% chance for a 50-basis-point reduction, according to CME Group's FedWatch tool.

What Economists Expect From July's PCE Report

• The consensus among Wall Street economists, as tracked by TradingEconomics, forecasts that the headline PCE annual inflation rate will rise from 2.5% in June to 2.6% in July, ending a three-month streak of declines.
• On a monthly basis, observers expect the headline PCE to increase by 0.2%, up from 0.1% in June.
• Core PCE inflation, which excludes food and energy, will likely climb from 2.6% to 2.7% annually, with a steady monthly increase of 0.2%.

July's PCE Uptick Likely Driven By Base Effects

If these predictions hold true, July's PCE inflation would show a rise from June's figures. Bank of America analysts attribute this increase to base effects in the annual readings.

"We project July headline and core PCE inflation at 0.17% and 0.19% month-over-month, respectively. This would result in annual rates of 2.6% (headline) and 2.7% (core), a 0.1 percentage point increase due to base effects," BofA analysts said.

This uptick should not be interpreted as a sign of firming inflation. Analysts recommend focusing on the three-month and six-month annualized rates for a clearer picture of inflation trends.

Potential Market Impacts

A higher-than-expected PCE report could boost the U.S. dollar index (DXY), tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP). Treasury yields might also rise, potentially leading to declines in the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT).

Unless the report reveals a significant inflation increase, it is unlikely to derail expectations of a September rate cut.

Conversely, a lower-than-expected PCE report could benefit equities. The SPDR S&P 500 ETF Trust (NYSE:SPY) and the Invesco QQQ Trust (NASDAQ:QQQ) are likely to gain Friday if data reinforces the likelihood of forthcoming rate cuts.

Small caps, as tracked by the iShares Russell 2000 ETF (NYSE:IWM), might also be a major market beneficiary from a benign July PCE inflation report.

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Illustration created using artificial intelligence via DALL-E.