The gold market has had a ride this morning as the latest data for the Consumer Price Index was released. According to the U.S. Department of Labor, the headline inflation rate declined from the previous month. July registered a reading of 8.5% versus estimates looking for a rise of 8.7%. On a monthly basis, the core reading was unchanged, however, and may have been higher if not for the recent decline in gasoline prices.
Core inflation rose 5.9% on a year-over-year basis and was in line with the same increase seen in June. Core inflation was slightly below estimates, however, on both a year-over-year basis as well as a monthly basis. The monthly advance of .3% was below estimates and may give the policy doves something to consider.
In the immediate aftermath of the data release, gold prices shot higher to nearly $1825 per ounce. They have since cooled rapidly, however, and presently sit around the $1795 area as of this writing.
While the headline figure was lower than expected, it was not low enough to force the Fed to rethink its position. A rise of 8.5% year-over-year is still a major rise in price pressures. The core rate was also very high on a year-over-year basis, and may also not provide the Fed with anything new worth consideration. In fact, the Fed would almost certainly stick with its plans for aggressive tightening if it had to make the choice today.
In order for the Fed to rethink its plans or adjust them, inflation will have to show beyond a doubt that it has already peaked. While some indications point to that having occurred, such as weaker commodity prices and weaker data, the figures have not been enough to warrant a change from the Fed. Inflation is still running very hot and near 40-year highs. Until it lets up considerably, the Fed is likely to stick to its plans for aggressive hikes regardless of the damage caused to the economy.
Because the FOMC does not meet this month, the markets will have several more weeks of data to scrutinize before the Fed meets again. A lot can change in a few weeks’ time, although this era of inflation may take substantially longer to cool down. Today’s CPI data, and more data like it, could give the Fed reason to take a pause, however, and allow some time for their recent rate hikes to work their way through the economy.
If the data stream shows strength in the weeks ahead or if it shows inflation lingering near 40-year highs, the Fed may see no choice but to hike rates aggressively in September and beyond. Expectations are currently for a 75-point hike in September from the Fed, although it could elect to raise rates more or less than that.
The gold market may find itself moving sideways in the weeks to come as it awaits new inputs and more clues from the Fed about policy. The capitulation trade for gold may be yet to arrive, thus longs should be careful for the time being.