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Gold prices drop sharply then recover following surge in U.S. CPI data

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Editor's Note: The article was updated to reflect rising prices following an initial selloff.

(Kitco News) - The gold market has managed for now to overcome strong selling pressure and prices have pushed into positive territory after consumer price pressures surged higher in April.

Wednesday, the U.S. Labor Department said its U.S. Consumer Price Index rose 0.8% in April, after a 0.6% rise in March. The data significantly beat consensus forecasts as economists were forecasting a 0.2% rise.

The report said that annual inflation rose 4.2% last month.

“This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008,” the report said.

Stripping out volatile food and energy prices, core inflation also rose more than expected, increasing 0.9% in last month, following March’s rise of 0.3%. The report said that this is the largest increase in core CPI since April 1982.

Gold prices were trading in roughly neutral territory just ahead of the data and dropped sharply in initial reaction; however, prices have managed to bounce off their session lows and climed into positive territory. June gold futures last traded at $1,838.60 an ounce, up 0.14% on the day.

At first blush, the report should be positive for gold, which is seen as an inflation hedge; however, some analysts have noted that rising inflation could force the Federal Reserve to raising interest rates faster than expected.

“Everyone was expecting a bump because of base effects but this is truly a surprise and is going to test the FOMC resolve and the market's resolve to look through bottlenecks or temporary factors,” said Adam Button, chief currency strategist at Forexlive.com.

Andrew Grantham, senior economist at CIBC also said that the latest inflation numbers could put some renewed pressure on the U.S. central bank.

“While the dramatic upside surprise was driven primarily by a couple of standout areas, which are obviously unlikely to repeat such readings going forward, there was enough firming in inflation elsewhere as well to suggest that price pressures could prove more persistent than FOMC projections and the consensus forecast seem to suggest,” he said.

Michael Pearce, senior U.S. economist at Capital Economics said that although the inflation numbers were scary, some of components of the report point to a transitory rise. He added that this report won’t force the Fed to adjust its monetary policies.

“With employment still more than 8 million short of its pre-pandemic level, we expect the Fed to maintain its dovish line, even if, as we expect, inflation gains broaden out over the coming months,” he said.

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