Fears of a stock market crash are swirling ahead of the April Personal Consumption Expenditures (PCE) inflation report due Friday, May 31. Indeed, the encouraging results of the Consumer Price Index (CPI) report has lifted investors’ hopes of rate cuts to come. Now, potential confirmation from the Federal Reserve’s favorite inflation gauge may just seal the deal.

What should you expect this time around?

Well, hot on the trail of the surprisingly promising CPI, investors have high hopes for the PCE. If you recall, the CPI rose 0.3% in April, better than projections of a 0.4% jump and a slight deceleration from March’s 0.4% increase. The CPI climbed 3.4% annually in April, also below March’s 3.5% reading.

While it wasn’t an astonishing inflation beat, it was enough to return hopes of rate cuts to a then-downtrodden Wall Street. Indeed, after several months of hot inflation readings this year, many began speculating that the central bank may not lower the benchmark rate at all in 2024 with inflation still higher than preferred. The April CPI changed all of that — putting even more onus on the PCE to live up to its predecessor.

The Cleveland Fed’s Inflation Nowcasting indicator predicts a 0.27% increase in the PCE in April, putting the annual rate at 2.68%. This is below March’s 0.3% PCE increase and accompanying 2.7% year-over-year (YOY) rate, mirroring the CPI. Should the prediction prove accurate, expect Wall Street to react positively.

Will the PCE Cause a Stock Market Crash?

Wall Street breathed a huge sigh of relief following the CPI reading — so much so that many analysts have predicted the Fed will opt to begin lowering rates in September, with the war on inflation presumably on track to a smooth conclusion.

Indeed, the rate-sensitive Nasdaq Composite is up nearly 2.5% in just the few weeks since the CPI print as investors daydream of a less restrictive monetary environment.

That said, the PCE will be the ultimate test. Should the Fed’s favorite inflation gauge confirm the disinflationary trajectory of the CPI, it would further strengthen the case for rate reductions to come. Conversely, if the PCE sings a different tune than the CPI, it may slash hopes for rate cuts this year.

“So [if] we get positive numbers off of [the PCE] […] it’s a really good sign for the economy. If it surprises to the upside on inflation that could really derail things,” said Investor’s Business Daily News Editor Ed Carson. “I think markets are starting to feel like, hey, maybe things are getting better again on this front. And so that could be a game changer. That would not be something that markets would like.”

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.