Gold prices jump as U.S. CPI rises 0.2% in July

(Kitco News) – The gold market has rebounded from its lows and is trading in roughly neutral territory as higher consumer prices continue to embed themselves in the broader economy.

The Consumer Price Index (CPI) rose 0.2% last month after June’s 0.3% increase, the U.S. Bureau of Labor Statistics reported on Tuesday. The inflation data rose in line with expectations.

Headline inflation increased 2.7% over the past 12 months, coming in slightly below expectations. According to consensus estimates, economists had been looking for a 2.8% increase.

At the same time, core inflation, which strips out volatile food and energy prices, rose 0.3% last month, matching June’s increase of 0.3% and aligning with consensus forecasts.

However, annual core inflation rose 3.1% over the last 12 months, slightly hotter than the expected 3.0% increase.

Some economists note that the rise in annual core CPI does not bode well for consumption, as it is an early sign that higher prices are becoming embedded in the economy.

The report highlighted broad increases across component indexes, including medical care, airline fares, recreation, household furnishings and operations, and used cars and trucks.

Meanwhile, rising shelter costs—up 0.2% last month—were the primary contributor to headline inflation. In some positive news, consumers are seeing relief in energy prices; the energy index fell 1.1% in July as the gasoline index dropped 2.2% over the month.

The energy index has declined 1.6% over the past year. However, the food index has increased 2.9% over the same period.
The gold market is seeing solid momentum in its initial reaction to the inflation data, moving into positive territory for the day. Spot gold last traded at $3,344.10 an ounce, roughly unchanged on the session.

Traditionally, higher inflation is seen as negative for gold, as it could prompt the Federal Reserve to maintain restrictive monetary policy. However, markets are still widely anticipating a rate cut in September, as weak labor market data continues to overshadow higher consumer prices.

Analysts note that this is creating a favorable environment for gold: higher inflation combined with lower interest rates sharply reduces real yields, lowering the opportunity cost of holding the precious metal as a non-yielding asset.

Larry Tentarelli, Chief Technical Strategist for Blue Chip Daily Trend Report, said that although headline inflation rose less than expected last month, it remains elevated and places the U.S. central bank in a difficult position.

“While one data point does not make a trend, two consecutive months of higher 12-month inflation will make it difficult for the Fed to justify a rate cut at their September 17 meeting,” he said. “We do not expect a September rate cut unless the jobs market drops off drastically over the next 45 days. If the Fed has to choose between shoring up the labor market or fighting inflation, we believe they will opt to backdrop the labor market.”

Jeffrey Roach, Chief Economist for LPL Financial, said that although core inflation has picked up, it won’t stop the Federal Reserve from cutting interest rates.

“Investors must come to grips with inflation above the Fed’s target amid a backdrop of slower growth, setting things up for stagflation-lite. Despite the increase in core inflation, we expect the Fed to cut rates next month as they pay closer attention to the weakening labor market,” he said.

Neils Christensen has a diploma in journalism from Lethbridge College and has more than a decade of reporting experience working for news organizations throughout Canada. His experiences include covering territorial and federal politics in Nunavut, Canada. He has worked exclusively within the financial sector since 2007, when he started with the Canadian Economic Press.