The SPDR S&P 500 SPY has beentrending lower this week as newdata continues to suggestthat a more hawkish Federal Reserve could be preparing to swoop in and stiflemarkets. The central bank's preferred inflation measure will drop Friday in what could be a pivotal report for investor sentiment.

What To Know: The Bureau of Economic Analysis is set toreleasePersonal Consumption Expenditures (PCE) price index data for January at 8:30 a.m. ETFriday.

PCE datais the Fed'spreferred inflation gauge.It's released on a monthly basisand showschanges in the prices of goods and services purchased by consumers in the U.S.

Last month, the bureau reporteda 5% increase inPCEforDecember. The data wasdown from 5.5% in November and came in below economist estimates of 5.5%.Core PCE came inup 4.4% in December,inline withestimates.

Why It Matters: Although inflation readings continue to show declines on a year-over-year basis, many experts believe inflation is not coming down fast enough for the Fed to ease its stance.

Earlier this month, the Labor Departmentreporteda6.4% rise in CPI for January, downfrom 6.5% in December, butabove economist estimates of 6.2%.

Thursday morning,the Bureau of Economic Analysis saidU.S.gross domestic product(GDP)increased by an estimated2.7% in the fourth quarter versus estimates for a 2.9% jump.

The Labor Department alsoreportedjobless claims of 192,000for the week ending Feb. 18, which wasbelowaverage economist estimates of 200,000. The continued strength in the labor market is another signthe Fed will continue to be aggressive in its fight against inflation.

The likelihood the Fed will opt for a 0.5% hike at its upcoming meeting in March continues to climb.The bond market is currently projecting a 73% chance of a 0.25% hike and a 27% chance of a 0.5% hike, according to CME Group data. Thisis upfrom a less than 10% chance of a 0.5% hike before CPI data was released.

Minutes from the Fed's last meeting showed that a few participants were in favor of a 0.5% hike in January.

"With inflation still well above the Committee's longer-run goal of 2 percent, participants agreed that inflation was unacceptably high," the minutes said.

Related Link:Fed Minutes Show A 'Few' Participants Favored 0.5% Hike, Inflation Still Remains 'Unacceptably High'

Hotter-than-expected PCE data could further increase the chances of a more aggressive rate hike at the Fed's next meeting.Economists are anticipating a 4.3% year-over-year increase in CorePCE for January,according toBenzinga Pro.

SPY Price Action: The SPY wasup 0.61% at $400.99 at the time of publication. Friday's PCE data is likely to spark increased volatility one way or the other.

Photo:Steve Buissinnefrom Pixabay.