- The headline inflation in the US increased by 3.2%, beating forecasts of 3.1%.
- Investors will now look to next week’s Fed policy meeting for more clues on the outlook for rate cuts.
- Gold prices were near record highs on Monday after Friday’s jobs report.
Gold prices fell on Tuesday after the US inflation report renewed inflation worries and dimmed Fed rate-cut expectations. The Consumer Price Index report revealed a higher-than-expected figure for the annual rate, raising concerns that the Fed might decide to delay rate cuts further.
Core US inflation (Source: Bureau of Labor Statistics)
Notably, US headline inflation increased by 3.2%, beating forecasts of 3.1%. Meanwhile, inflation increased by 0.4% on a monthly basis. At the same time, core inflation increased by 0.4% in February. Although inflation has dropped considerably from its peak, the Fed will be forced to keep interest rates high if it remains stubborn at current levels. If the Fed starts cutting rates too early, inflation might flare up again, needing high rates. Higher interest rates reduce the appeal of gold, which has no yield.
Policymakers have repeatedly called for patience in the fight to lower inflation. Last week, Powell said the central bank will likely cut rates later in the year. However, he still needs evidence that inflation is declining to the 2% target. Tuesday’s report revealed an increase, though small, in inflation. As a result, the market took this to mean higher interest rates for longer, leading to a decline in gold.
After the inflation report, investors will now look to next week’s Fed policy meeting for more clues on the outlook for rate cuts. Recent economic data from the US has painted a mixed picture, making it hard to predict what the Fed will say regarding rate cuts. However, the central bank will likely keep interest rates at current levels.
Gold prices were near record highs on Monday after Friday’s jobs report. The US added more jobs than expected in February. However, the unemployment rate also surged, raising bets of a June rate cut. Weakness in the US labor market is bullish for gold as it indicates weaker demand. This eases inflation pressure, allowing the Fed to cut interest rates. Inflation will eventually reach the 2% target if the labor market weakens.
Moreover, gold has stayed strong amid high demand from central bank purchases. Analysts believe gold will end the year strong as US interest rates drop. As a result, gold bulls remain resilient despite the recent mixed data.
