Stocks are dropping after a key inflation report came in hotter than expected

• Stocks slid as PCE inflation data was hotter than expected.
• Investors have grown nervous about a reinflationary scenario.
• February core PCE rose 2.8% from a year ago.

A fresh inflation report hit stocks on Friday, as investors reacted to data that showed prices rose faster than expected last month.

February's core personal consumption expenditures index advanced 2.8% from a year ago, slightly outpacing consensus projections of 2.7%. The core index, a measure favored by the Federal Reserve, rose 0.4% compared to estimates of 0.3%. That's the biggest monthly increase in a year.

The hotter-than-expected data is fanning investors' fears that price increases are accelerating again right as President Donald Trump is embarking on a trade war that is widely expected to stoke further inflation.

"Much remains uncertain and it's premature to be drawing judgments about impacts, but seeing this pattern in hard data and not just surveys could feed apprehension before next week's announcements," David Alcaly, lead macroeconomic strategist at Lazard Asset Management, wrote after the report.

Meanwhile, consumer spending was lower than expected, rising 0.4% below the 0.5% forecast.

All told, the data could continue to stoke Wall Street's fears that sticky inflation and waning economic activity could result in a stagflation scenario. Such an outcome has been described by forecasters as a worst-case scenario for the economy, as high inflation could prevent the Fed from lowering rates to stimulate the economy.

Here's where indexes stood shortly after the 9:30 a.m. ET opening bell on Friday:

• S&P 500: 5,677.11, down 0.28%
• Dow Jones Industrial Average: 42,232.87, down 0.16% (-68.83 points)
• Nasdaq Composite: 17,715.12, down 0.5%

The PCE data covers data before President Donald Trump's tariff policies kicked in, but expectations are high that increased levies will eventually result in higher consumer costs.

"While the economy appears solid, business executives are adopting a cautious stance on new investments, largely due to the Trump Administration's aggressive and unpredictable tariff policy," said Matt Stephani, President of Cavanal Hill Investment Management.

"Consequently, the Fed is likely to maintain its current stance, as it must navigate the short-term inflationary effects of tariffs and higher inflation data amid decade-high business uncertainty."

Markets are headed for a key April 2 tariff date next week, which Trump has described as "Liberation Day." The president said this week that the reciprocal tariffs he's promised could be more lenient than previously expected, which sparked a rally in stocks earlier in the week.