The Consumer Price Index rose 0.3 percent in December. What does it mean for the Fed’s policy and the gold market?
Inflation has finally arrived. Consumer prices increased 0.3 percent last month, following a 0.2 percent rise in November, according to the Bureau of Labor Statistics. The jump was mainly driven by a 6 percent surge in fuel oil and a 3 percent increase in gasoline prices. However, the core CPI, which excludes the volatile energy and food categories, also increased – by 0.2 percent. What is more important is that the overall CPI rose 2.1 percent, while the core CPI jumped 2.2 percent in the whole 2016.
As one can see in the chart below, the overall consumer inflation rate really accelerated over the last several months. The inflation rate rose from 0 percent in September 2015 to the current 2.1 percent. It is bad news for the gold bulls, really. Inflation has just risen above the Fed’s 2-percent target (OK, to be precise the Fed’s objective is 2 percent inflation as measured by the annual change in the price index for personal consumption expenditures, but the rise in the CPI will be probably reflected by the subsequent increase in the PCEPI). It strengthens the hawks’ camp in the U.S. central bank.
Chart 1: CPI (blue line) and core CPI (red line) year-over-year from December 2011 to December 2016.
What is more, the buildup of inflationary pressure suggests that reflation is coming, with or without Trump. It is really important, as many analysts believe that the current correction of the Trump’s rally implies the end of the reflation story. It does not seem so – the recent reflationary forces started to work much before the Trump’s victory in the presidential election. Therefore, the recent correction may not be the end of the dollar rally. Similarly, the January upward move in gold may be temporary. Yesterday, the yellow metal plunged from $1,216 to $1,204 on a hawkish Yellen’s speech in San Francisco. And a lot depends on the upcoming remarks from the new president. The inauguration is due on Friday – stay tuned!
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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.
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