Inflation has been the talk of the town for months now. Inventory shortages, supply chain bottlenecks and other issues have all been linked to the steep rise in U.S. inflation in recent months. Inflation has become so problematic at this point that even the Federal Reserve has acknowledged it after saying it believed it was only transitory in nature for a long period of time. Today’s latest reading of the Consumer Price Index only adds credibility to the argument that inflation is entrenched and here to stay. The gauge registered its highest reading in decades today, showing an annual price rise of a whopping 7.5%.
The 7.5% reading was above consensus estimates for a rise of 7.2%. The hottest inflation reading in some 40 years has put pressure on both stocks and the metals complex. The data falls clearly into the camp of the policy hawks, who want to see the Fed act aggressively with multiple rate hikes to battle rising price pressures. The reading also fueled a spike higher in treasury yields which is also adding pressure to the metals in early morning action. The benchmark 10-Year Note is currently fetching a yield of 1.994%, its highest yield in over two years.
The notion of runaway inflation is not new nor should it be discounted. The Fed has seemingly been well behind the inflation curve for some time now. The central bank could, therefore, be forced to act far more aggressively than previously anticipated. This aggressive action could come in several forms, including a faster pace of more rate hikes or a stringer hike to begin with. The Fed has not made a half-point rate increase since 2000, at which time the dot.com bubble burst and stocks went sharply lower. Some analysts have suggested that hot inflation could pave the way for the Fed to hike rates by a half-point in March rather than the standard quarter-point rise. While such a move could potentially help ease the rise of inflation, it is not without risks. Stock markets, for example, do not love the idea of higher interest rates. The era of free, easy money has been a major contributor to stock market upside in recent years, according to some, and without it the equity markets could potentially see a major slide and trend reversal.
Although gold is slightly higher this morning, the metal may remain range bound until the Fed does actually take action. The metal could see a rise during this tightening cycle as it has during previous tightening cycles, and moderately higher interest rates may not be enough to halt buying interest in the yellow metal. The bulls are not far from a key level they must breach. A close above the $1850 area could indicate a fresh leg higher for gold. The bears are targeting a close below $1800 and $1780. A close beneath these levels could set the stage for a fresh leg lower.