According
to the U.S. Department of Labor, the Consumer Price Index (CPI) rose by
0.1 percent in March. Does it mean that inflation is rising, which would
bring us closer to the next Fed hike? How can this data affect the gold market?
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1
percent in March, following a 0.2 percent decline in February. The core CPI,
which excludes energy and food, rose 0.1 percent, following a 0.3 percent
increase in February. It was the smallest increase since August 2015, which
shows that the inflationary pressure is not building. The rise in the CPI was
partially driven by a 0.9 percent increase in energy prices (the first jump
in four months), which offset lower prices for groceries (the food index fell
0.2 percent).
On an annual basis, the CPI rose 0.9 percent, while the core CPI increased
2.2 percent. Both indexes moved slightly less than in February (1.0 percent
and 2.3 percent, respectively). It means that the recent inflation upswing
(see the chart below) may not be sustainable.
Chart 1: CPI (blue line) and core CPI (red line) from March 2015 to March
2016.
It is worth pointing out that the inflationary pressure is softening
despite the rise in energy prices. Producer
prices also do not show any inflationary trends in the U.S. economy.
Wholesale prices fell 0.1 percent in March (despite the big increase in gas
prices), while core PPI was flat. In the past 12 months, the PPI declined 0.1
percent, while core prices rose only 0.9 percent.
How will the recent inflation number affect the gold market? Well, it is
not easy to say. On the one hand, it may convince the Fed to prolong its
waiting mode, as it suggests that price pressures remain muted. Given that
the U.S. central bank would like to see inflation rise before it hikes
interest rates again, the March report on the CPI should be positive for the
price of gold.
On the other hand, softer inflation could theoretically translate into
higher real interest rates, which would be negative for the gold prices.
However, as one can see in the chart below, there is no clear negative
correlation between the CPI and real interest rates. Therefore, the first
channel should be stronger and the eased inflationary pressure should be
bullish for the gold market on balance.
Chart 2: The CPI (red line, right axis, as percent change from year ago)
and real interest rates (blue line, left axis, as yield on 10-year
inflation-indexed Treasuries) over the last ten years.
Summing up, the CPI rose 0.1 percent in March, but the inflationary
pressure generally softened. Given that the gold trade is now about the Fed’s
actions, the eased inflationary pressure should be positive for the price of
gold, as it could convince the hawks among the FOMC members to wait longer
before further hikes. However, investors should remember that the data on
inflation is quite volatile and if energy prices steadily rise, the inflation
pressure may strengthen.
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Disclaimer: Please note that the aim of the above
analysis is to discuss the likely long-term impact of the featured phenomenon
on the price of gold and this analysis does not indicate (nor does it aim to
do so) whether gold is likely to move higher or lower in the short- or medium
term. In order to determine the latter, many additional factors need to be
considered (i.e. sentiment, chart patterns, cycles, indicators, ratios,
self-similar patterns and more) and we are taking them into account (and
discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News
Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
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