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Gold prices pushing higher as U.S. inflation heats up

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Editor's Note: The article was updated to reflect a small rally in gold prices following the CPI data

(Kitco News) - In a delayed reaction, the gold market is seeing renewed bullish momentum as consumer price pressures picked up in March.

Tuesday, the U.S. Labor Department said its U.S. Consumer Price Index rose 0.6% in March, after a 0.4% rise in February. The data was slightly strong than expected. Consensus forecasts were expecting to see a 0.5% rise.

"The March 1-month increase was the largest rise since a 0.6-percent increase in August 2012," the report said.

The report said that annual headline inflation increased 2.6% last month.

Stripping out volatile food and energy prices, core inflation rose 0.3%, also coming in higher than expectations. Economists were expecting to see a 0.2% rise.

For the year, core CPI rose 1.6%, the report said.

In initial reaction, the gold market was treading water in positive territory. However, the market is starting to attract some bullish attention following the inflation data. June gold futures last traded at $1,741.30 an ounce, up 0.50% on the day.

Economists and market analysts note that rising inflation pressures will help to relieve some of the selling pressure in the gold market as nominal bond yields have seen a sharp rise since the start of the year. Market analysts note that higher inflation pressures mean that real interest rates will remain at historically low levels.

However, some market analysts note that the risk in higher inflation is that it could prompt the Federal Reserve to raise interest rates soon than expected.

The Federal Reserve has said repeatedly during the last few weeks that it is not expecting to raise interest rates until they see signs that the U.S. economy is well on its way to recovering from the COVID-19 pandemic.

Although inflation is on the rise, many economists are warning consumers to look past some of the data as last year's COVID-19 disruptions will impact annual forecasts. CIBC said that they expect CPI to rise to 2.5% this year, but this will be transitory.

However, Katherine Judge, senior economist at CIBC, said that investors could see a rate hike sooner than expected.

"It won't be until 2022 when an earlier closing of the output gap leads to core price pressures moderately above 2% on a more sustainable basis, however, allowing the Fed to hike rates as early as Q3 of 2022," said she said.

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