Traders are watching to see if March consumer inflation data will run hotter than expected Wednesday, just as producer prices did Tuesday.
The consumer price index is reported at 8:30 a.m. ET. It is expected to be up 2.4 percent on a year-over-year basis in March and 2.1 percent on core, which excludes food and fuel. That compares with a 1.8 percent increase in core CPI in February. Core is expected to rise 0.2 percent on a monthly basis.
"I think there is definitely the possibility for a surprise to the upside," said Peter Boockvar, chief investment strategist at Bleakley Financial Group.
The market has been volatile based on headlines about tariffs and trade disputes lately, but the potential for more rapidly rising interest rates has also been a concern. A jump in inflation could be a sign that the Fed would have to raise interest rates more rapidly if it begins to run above its 2 percent target.
While the markets watch CPI, the Fed favors the PCE deflator, which is still running below its target.
Producer prices are watched as a measure of what might ultimately show up in consumer inflation. The core producer price index Tuesday was up 3 percent, excluding food and energy, compared with expectations for 2.9 percent year over year.
"Net, net, the economy is generating some heat with inflation at the producer level picking up. Will it lead to more consumer inflation? Commodities are 25% of core CPI purchases," wrote Chris Rupkey, chief financial economist at MUFG.
Rupkey notes that CPI was depressed by a drop in cell phone rates last February, but that will drop out of the CPI data in March, and that helps the comparison from last year's level.
"Time will tell if the fuse is lit and the clock is ticking for higher inflation that prompts a faster path for interest rate hikes from Fed officials seeking to thread the needle and balance supply and demand pressures in this long-dated economic expansion. Policy is always a balance between too hot and too cold and right now the Fed's policy is running the economy a little on the hot side," he noted.