PRIMER - US PCE inflation is due at 12:30GMT/08:30EDT

EXPECTATIONS: The consensus expects core PCE to rise +0.4% M/M, matching the December print, while the annual rate of core PCE is seen rising to 3.1% Y/Y from 3.0%; headline PCE prices are expected to rise +0.3% M/M (prev. +0.4%), with the annual rate unchanged at 2.9% Y/Y. After the January CPI and PPI reports, Reuters said forecasts for January core PCE ranged from 0.37-0.49% M/M, with Y/Y seen at 3.1% (though the WSJ Fed watcher Timiraos suggested the figure could be between 3.1-3.2%).
DRIVERS: Similar to the CPI data, the conflict in the Middle East has clouded the inflation outlook, and whether the higher energy costs prove a short-term one-off move or whether the conflict drags on and, by extension, uncertainty over higher energy prices persists. In terms of the underlying drivers, analysts at Barclays expect a hot report, given the upside PPI surprise, notably in domestic passenger air travel and brokerage services, with stronger core services more than offsetting softer core goods. Barclays writes that core services are seen accelerating to 0.5% M/M, led by transportation, healthcare and non-profit institutions, while core goods slow to 0.22% M/M. The bank still sees core PCE at 2.8% Q4/Q4 in 2026 and 2.1% in 2027, and expects core inflation to move towards target-consistent levels in H2 2026, though near-term annual prints should remain elevated. Barclays says the data is consistent with another FOMC hold in March.
POTENTIAL MARKET REACTION: Analysts note that the market reaction might be more sensitive to an upside surprise (given that would show price pressures were more elevated than thought even before the Middle East conflict, which has pushed up energy, base metals, and food crop prices) while any downside surprise could be easier to look through.