Spot gold spikes above $4,438/oz as annual core CPI rises 2.5% in July

(Kitco News) – The gold market is setting fresh session highs after the latest data showed U.S. inflation pressures cooling in line with expectations last month.

The headline Consumer Price Index (CPI) rose by 0.1% last month after June’s -0.4% decrease, the U.S. Bureau of Labor Statistics announced on Wednesday. The inflation data matched expectations, as economists were looking for a 0.1% increase.

The report noted that annual headline inflation rose by 3.4% over the last 12 months, also in line with the consensus forecast of economists, and below the 3.5% reported in June.

Core CPI, which strips out volatile food and energy prices, increased by 0.2% last month, in line with the 0.2% expectation and above June’s flat 0.0% reading.

Annual core inflation rose by 2.5% last month, also in line with economists’ expectations, and following the 2.6% rise posted in June.

The gold market shot to a fresh session high of $4,438.30 following the latest inflation data. Spot gold last traded at $4,435.58 per ounce, up 1.54% on the day.

Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, siad the latest CPI data gives the Federal Reserve some breathing room.

“The big surprise with a report that had no surprises (all of the data came perfectly in line with the estimates) is that a situation where inflation isn’t reaccelerating, coupled with the most recent, weak jobs report gives the Fed more time to wait,” he said. “Typically, the market would be buoyed by the thought of rate cuts, but in a world where many are expecting rate hikes, anything that can delay – or squash the need for – rate hikes will be viewed positively. The market and the Fed won’t stop worrying about inflation, and there are another set of reports before the next Fed meeting, but these two reports (Jobs and CPI) are going to go a long way toward keeping the bulls running in the near term.”

Jeffrey Roach, Chief Economist for LPL Financial, said inflation is clearly on the right track, though some of the improvement reflected misplaced optimism.

“Energy prices fell in July as investors had high hopes that the Middle East crisis would improve,” he said. The decline in energy prices helped soften the inflation pressures of the month. Unfortunately, those high hopes were short lived.”

“As the economy reaches the end of the year, we should expect inflation to decelerate to 2.7% as transportation costs and health care costs ease,” Roach said. “We expect the debate at the September FOMC meeting to be lively as the economy experiences a tight labor market while the inflation picture is quite blurry. Our baseline is the Fed holds rates steady, but an increasing number of voting members are hawkish and could convince the majority to implement a hike. Overall risk sentiment is positive as inflation is expected to improve by the end of the year.”

Bill Adams, Chief U.S. Economist, Fifth Third Commercial Bank, said the July CPI report should be enough to nudge the Fed toward a rate hold in September. 

“Fed policymakers signaled in July that core inflation would have to improve between now and then for them to refrain from raising interest rates,” he said. “The Fed will also see the August CPI reports among a number of other data releases, so the CPI is not the final word.”

Adams cautioned that while lower gas prices helped CPI over the last two months, that trend might be played out. “Daily national prices have averaged $4.05 per gallon so far in August according to AAA, up from $3.96 in July,” he wrote. “The Iran conflict is the biggest near-term driver of inflation.”