- The US consumer price index rose 0.3% last month.
- There was a surprising decrease in new claims for unemployment benefits.
- Traders see a 67% probability of a Fed rate cut in March.
On Thursday, gold dropped to a one-month low as the dollar rose due to hotter-than-expected inflation data. Moreover, hawkish remarks from Fed officials raised concerns that higher interest rates might continue beyond March. The dollar index rose after US consumer prices rose more than anticipated in December because it potentially delays an anticipated US rate cut in March.
US inflation (Source: Bureau of Labor Statistics)
The Labor Department’s Bureau of Labor Statistics reported that the consumer price index rose 0.3% in December as Americans paid more for shelter and healthcare. Consequently, some believe it was premature for the Federal Reserve to consider cutting interest rates.
Other data on Thursday indicated a tight labor market at the beginning of the year, with a surprising decrease in new claims for unemployment benefits. This followed news last Friday that the economy added 216,000 jobs in November, with an increase in annual wage growth.
Cleveland Fed President Loretta Mester suggested it would likely be too soon for the central bank to cut its policy rate in March.
In an interview with Bloomberg TV, Mester said, “I think March is probably too early for a rate cut because I think we need to see more evidence that inflation is easing.” She emphasized that the December CPI report indicates that more work is necessary, requiring a restrictive monetary policy. The Fed’s rate-setting committee will meet next between January 30th and 31st. Markets expect the Fed to maintain its policy rate within the 5.25%-5.50% range.
Meanwhile, Richmond Fed chief Tom Barkin criticized the narrow focus on goods in inflation gains. Although the US central bank forecast rate cuts in December, the timing and pace remain uncertain as officials analyze economic data. According to the CME Fedwatch tool, traders now see a 67% probability of a rate cut in March, compared to the 71% chance before the report.
Higher rates diminish the appeal of gold. Moreover, there is excitement surrounding Bitcoin, which may be causing investors to dump other asset classes, contributing to the selling. Attention is shifting to Friday’s US producer price index.
New York-based independent metals analyst Tai Wong noted, “Gold is just grudgingly lower, and the market hopes PPI will show softer results.”