(Kitco News) - The gold market is seeing some volatility as U.S. inflation pressures continue to rise, but remain in line with economists' expectations.
Although higher energy prices are becoming embedded in the broader economy, according to some analysts, investors were fearing a much bigger jump in inflation.
The Consumer Price Index (CPI) rose 0.5% in May, following a 0.6% increase in April, the U.S. Bureau of Labor Statistics announced Wednesday. The inflation data were in line with economists’ expectations.
Over the last 12 months, headline inflation has risen 4.2%, up from the 3.8% increase reported in April.
At the same time, core CPI, which strips out volatile food and energy prices, rose 0.2% last month, compared to the 0.4% increase in April. Core inflation was slightly cooler than expected, as economists were looking for a 0.3% increase.
Annual core inflation rose 2.9%, up from 2.8% reported in April. Annual core inflation increased in line with consensus estimates.
With gold investors bracing for the worst, the yellow metal saw a bit of a relief rally in its initial reaction to the latest inflation data. Gold prices last traded at $4,164.43 an ounce, down roughly 2% on the day. The gold market has significant ground to cover, as analysts see further downside risks after prices broke below support at their 200-day moving average last week.
Although inflation is not spiraling out of control, it is still well above the Federal Reserve's 2% target, and markets are still pricing in potential rate hikes before the end of the year.
In a comment to Kitco News, Waleed Said, Technical Analyst at GivTrade, said that weaker-than-expected core inflation is currently driving the market.
“That tells investors underlying inflation pressure is cooling, even if the headline number is still sticky. For the market, this is broadly dollar negative, gold positive, and mixed for oil,” he said. “The key message is simple: inflation is not dead, but this print gives the Fed less reason to sound aggressively hawkish.”
In a recent interview with Kitco News, Jeff Clark, Publisher of The Gold Advisor, said that although inflation is elevated, it is still not high enough to force the Federal Reserve to hike rates. He explained that with rising sovereign debt, the risks of rising interest rates outweigh the risks of inflation.
He added that he expects gold will regain its luster when investors realize that the U.S. central bank is stuck.
The report shows that energy prices continue to have the biggest impact on inflation. Energy prices have been driven higher by significant supply disruptions resulting from the war with Iran.
The report said that the energy index rose 3.9% last month, following a 3.8% increase in April and a 10.9% increase in March.
“The energy index accounted for over sixty percent of the monthly all-items increase,” the report said.
While inflation is not accelerating beyond expectations, some analysts have said that the Federal Reserve will not be able to cut rates in this environment.
“It’s very possible that things wrap up in the Middle East and shipping gets back to normal over the course of the rest of the year, in which case we can see inflation come down over time and the Fed could hold off raising rates, but if things stay as they are currently, then all bets are off,” said Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management.
Jeffrey Roach, Chief Economist for LPL Financial, said that he expects the Federal Reserve to remove its easing bias at next week's meeting; however, he added that the central bank still has time before it will be forced to raise interest rates.
“Now that the Iran crisis has extended into June, we have begun to see broader impacts across several categories of consumer prices. If the Strait of Hormuz remains disrupted through the Labor Day weekend, we would expect the energy shock to affect additional sectors and heighten uncertainty about the future path of monetary policy. Rate expectations could be further upended if this crisis lasts throughout the summer,” he said.
