Economists predict a slight decrease in Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred measure of inflation, and a modest dip in consumer spending, in March’s personal income report set for release Friday. The predicted slowdowns might have a profound impact on the Fed’s meeting on May 2-3, as the report will be the last major economic report before the Fed weighs its next move on whether to raise interest rates. Here are five things to look out for in the report. 

1 Inflation, consumer spending expected to fall moderately

This month’s personal income report, set for release on Friday by the U.S. Bureau of Economic Analysis, will be the last major economic report before the Fed meets May 2-3, which economists expect to show signs the economy is slowing, but not quickly enough. Inflation and consumer spending are expected to ease somewhat in March but stay far higher than the Fed’s benchmark. The Core PCE price index, the Fed’s preferred measure of inflation, slowed to 5% on an annual basis in February, down from 5.3% in January. It was the lowest reading for the measure since September 2021 but still double the Fed’s goal of 2% inflation.

2 Wages are moderating but remain unsustainable to quell inflation

Economists' predictions expect data from the Labor Department to show that wages and salaries increased about 4.6 percent from a year ago. A slowdown from the end of last year but a level of growth that policymakers consider unsustainable since they help fuel inflation. While wage levels currently benefit workers, they worry the Fed, increasing the chances of more action from the Fed and raising the likelihood of a recession. Another layer to Fed's concern with wages not moderating quickly enough is the job market remains strong. While the last few job reports since January's surge in new hires showed fewer job gains, the job market and unemployment rate don't match the Fed's desire for a less robust workforce to tame inflation.

3 Inflation, Consumer spending rebounded after January's scare

After a period of slowing, January saw an unexpected rise in inflation coupled with a surge in consumer spending, signaling that the economy remained robust and the Fed had more to do to cool inflation. Then February’s report provided a promising rebound but did not deter the Fed from raising interest rates to 4.75% in March, despite a slowdown in consumer spending. While Friday’s report shows only moderate easing, the slowdowns are significant when compared to January’s surge in spending and worrying inflation data. The report, at the very least, should indicate that the economy has slowed significantly since January, even if it remains far stronger than the Fed might hope. 

4 Are we headed for a recession?

While Friday’s report is expected to yield mostly promising results, it will provide investors and economists a better sense of where the economy is headed and how the Fed might react. Most forecasters expect the Fed to raise interest rates by a quarter of a percentage point on Wednesday as it attempts to bring stubborn inflation to heel. But a recession will become more likely if inflation, wages, and consumer spending don’t start seeing more significant slowdowns. 

5 Banking turmoil looms large over the economy

No matter how Friday’s data turns out, the Fed will consider how the banking sector remains in turmoil after a series of high-profile bank failures in March. Uncertainty in the industry can prevent lenders from providing loans to consumers and businesses, weighing on the economy. If lending slows significantly, so would the economy, which the Fed will monitor as it makes its next move.