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The gold market is higher in Friday afternoon action as the bulls continue their push towards the $1800 level. The market is now just over this key level, and if it can sustain prices above it could be gearing up for a rapid run higher. The yellow metal is a bit higher from where it began the trading week, although the bulls may need to take a rest sometime in the sessions ahead.

This past week saw several key pieces of economic data. Perhaps most important for the gold market was the Consumer Price Index and Producer Price Index. Both of these indexes showed inflation potentially easing as both came in below market expectations. The miss for both of these data figures could be important down the road. They may give the Fed more to think about when it reconvenes to discuss rates in September. Any further signs between now and then may pressure the Fed to hike less aggressively, to take a pause or to reverse course and lower rates.

The next several weeks will see data closely monitored for further clues about the Fed and what it may do in September. If additional data points to inflation easing, then stocks and risk assets may see further upside. If the data shows inflation remaining near 40-year highs, however, there may be many more unknowns as the next FOMC meeting approaches. These unknowns could fuel market volatility and possibly another large wave of selling in equities and risk assets.

Despite this week’s lower-than-expected inflation data, price pressures do remain quite robust and near four-decade highs. Investors need to look past just a simple drop in the headline figures to look at core inflation data. The core rate, which strips out volatile food and energy costs, remains very high.

The Fed would possibly have to take interest rates much higher to have any significant impact on inflation at these levels. The central bank is unlikely to take rates to Volcker-era levels around 20%, however, and may elect to just give up the fight against inflation in the months ahead. The Fed is currently in a tight corner, as it looks to stabilize prices while avoiding a recession.

The Fed will have to be very careful in the months ahead as it looks to adjust policy. Even a slight misstep by the central bank could put the U.S. into recession or could fuel an extended period of stagflation. The Fed has said, time and time again, that it intends to battle inflation with all of the tools in its arsenal. This could mean that the Fed will stick to its game plan next month and raise rates accordingly.

Markets were expecting another rate hike of 75+points next month before this week. Despite the lower inflation data seen this week, the Fed could still hike by 75-points or could make a smaller hike of 50 or 25-points. A reversal at this time seems very unlikely but is also a possibility.