Gold Prices Hold Firm Amid Cooling Inflation Rates and Consumer Price Spikes

Last Thursday, the U.S. Labor Department released the highly anticipated Consumer Price Index data for July, revealing that consumer prices escalated on an annual basis for the first time in over 12 months. The report also included key inflation insights, showing cooling rates amid the Fed’s latest dovish strategies. Gold prices held steady following this release, showing modest gains between Thursday and Friday from $1,968.80 per ounce to $1,976.10 per ounce to close the week.

According to the latest data, the Consumer Price Index increased by 3.2% throughout the year up until July, representing a 0.2% increase from June’s previous annual increase of 3%. Market expectations placed this month’s year-on-year increase at 3.3%, meaning the data came slightly below predictions.

On a monthly basis, consumer prices increased by 0.2%, with shelter costs accounting for a whopping 90% of the rise.

“Don’t be fooled by the uptick in [year-over-year] inflation,” Julia Pollak, a chief economist at ZipRecruiter, explained. “Inflation is slowing and doing so across a broader range of goods and services.”

July’s figures showed cooling inflation rates for the fourth month in a row, despite the high CPI figures. The Core CPI number, which excludes energy and volatile food prices, came in 0.1% below market expectations at 4.7% year-on-year. Comparingly, June’s rate sat at 4.8% annually.

President Joe Biden believes this figure means positive news for the U.S. economy in terms of inflation. “Annual inflation has fallen by around two-thirds since last summer, and inflation outside of food and energy has fallen to its lowest level in any three-month period since September 2021,” Biden stated.

With price spikes for commodities like food and gas calming considerably, inflation is no longer fully devouring consumers’ wages. Biden believes the U.S. economy “remains strong,” given the latest data.

So, what does all of this mean for the gold market? Cooling inflation means the Federal Reserve can back off on its interest rate hikes. High interest rates increase the opportunity costs of buying assets like gold, so eased rates should support more investor demand in the gold market.

“The July 2023 report’s core CPI result should reinforce the view that the Fed can begin to rely more heavily on hawkish rhetoric than on further interest rate hikes,” Kurt Rankin, PNC senior economist, chimed in.

The Federal Reserve can now step back from its hawkish strategies and allow the economy to reset itself following previous actions from earlier this year. According to the CME FedWatch Tool, the probability of the Federal Reserve maintaining the current interest rate has increased by another four percentage points to 91%.

While the market seems fairly certain about the Fed’s decision coming in September, committee members have yet to release such decisive statements. The lack of clear answers may be why gold prices have lulled below the $1,900-per-ounce region awaiting the next Fed gathering. Until we receive clearer answers from the Federal Reserve, we may see similar hesitations in the gold market as investors await direction.

Core inflation still remains well above the 2% target, so interest rate drops likely won’t come for quite some time. Shelter costs accounted for 90% of the inflation spike last month, while energy costs increased by a modest 0.1%, the energy index increased by 12.5%, and food prices elevated by 4.9% over the last year.

“We know shelter costs are a lagging indicator, and the collapse in measures of new rent inflation demonstrates that over the next 12 months, shelter inflation will not just fall back to more normal rates, but might even drop below the pre-pandemic average,” Paul Ashworth, the chief North American economist at Capital Economics, explained. “Overall, there’s nothing here to suggest the Fed needs to push ahead with further interest rate hikes this year.”

With the odds of an interest rate hike in September dropping, gold may gain more attention from investors as the meeting nears. Less than 10% believe a hike will occur. The probability for a hike in November currently sits at 30%, likely because of the distance between now and the meeting.

If September’s meeting plays out as expected, given the recent data, gold could experience improved performance rates as investors happily accept the Fed’s new level of stability. Until then, many are choosing to strike now while prices are low. Moving forward, traders can continue to analyze the incoming data to assess how the Fed may respond in September.

As always, investors should consult their financial advisors before making any portfolio decisions.

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