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Gold Prices Drop Sharply Following Strong Rise In US CPI

Kitco News

(Kitco News) - Gold prices have lost some of their luster as inflation picked up more than expected in the first month of the new year.

Wednesday, the U.S. Labor Department said its U.S. Consumer Price Index rose 0.5% in January, after increasing 0.3% in December. The increase was stronger than expected as consensus forecasts were calling for a 0.2% increase.

The report said that annual inflation rose 2.1%.

Monthly core inflation, which strips out volatile food and energy costs, rose 0.3%, following a 0.4% increase in December. Economists were expecting to see a 0.2% rise in price pressures.

For the year, core inflation increased 1.8%. While CPI is not the Federal Reserves preferred inflation measures, price pressures are inching closer to its target of 2%.

Gold prices were in positive territory ahead of the report but have given up its gains in the initial reaction. April gold futures last traded at $1,3,325, down 0.41% on the day.

According to some economists, the stronger than expected inflation data has helped to solidify expectations that the Federal Reserve will raise interest rates in March. Some economists says that the data raise expectations that the central bank will raise rates four times this year.

"Underlying price pressures are picking up, which the Fed will be unable to ignore," said Michael Pearce, senior U.S. economist at Capital Economics. "Overall we think the increase in core CPI inflation in January is a sign of things to come over the rest of the year."

Gold has dropped sharply as the U.S. dollar has pushed higher along with 10-year bond yields, which continues to trend at its highest level since early 2014.

Avery Shenfled, senior economist at CIBC World Markets, said that that the stronger-than-expected inflation data will leave "little love" for equity markets as bonds continue to selloff.

Looking at the components of the index, the report said that there were broad-based incresaes; in particular, the energy index increased 3% last month as higher gasoline prices ofset decines in other engery products.

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