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(Kitco News) - If you didn't think inflation was going to heat up in 2021, then you haven't been paying attention.

The debate over the looming inflation threat just went into overtime and analysts are expecting the market to tests the Federal Reserve's commitment to maintaining its ultra-accommodative monetary policies.

This week markets saw annual U.S. CPI rise 4.2% last month, its most significant increase in 13 years. Meanwhile, Thursday, U.S. producer prices rose 6.2% for the year, the biggest increase on record.

However, gold's price action following this data has left many investors disappointed and frustrated… again. Just last week, we were talking about gold's next target at its 200-day moving average at $1,850 an ounce. However, the precious metal has struggled to catch a bid and is ending the week in relatively neutral territory.

But before investors start giving up on gold again, we should point out an important dynamic in the marketplace. While gold remains an important long-term inflation hedge, it also faces short-term headwinds as the latest data puts pressure on the U.S. central bank to tighten monetary policy sooner than expected.

There are some expectations that by August, the U.S. central bank will start laying some groundwork and preparing markets in the event that it starts tapering its asset-purchase program by the end of the year.

However, some economists think this scenario is too ambitious. There is still no clear picture of the inflation outlook and the economic recovery remains uncertain. According to many analysts, the U.S. central bank still has enough flexibility to be patient and look through the inflation numbers. However, the path for monetary policy is narrowing.

Famed economist Nouriel Roubini, CEO of Roubini Macro Associates and professor at the NYU Stern School of Business, told Kitco News chief editor Michelle Makori that the Fed is in a difficult position.

"Either you're behind the curve, you're going to cause inflation, or if you don't want to be any more behind the curve, and then you signal, 'I'm going to tighten,' then you could have a bond market and a credit market crash that could really weaken the economy, if not stall it. It's damned if you do, damned if you don't," he said.

While the data points to higher inflation, some economists have noted a significant factor in the marketplace is still global supply chain disruptions caused by the COVID-19 pandemic. There are some expectations that inflation will fall as the global economic recoveries and supply chains normalize. So some of these higher price pressures could prove to be transitory, but only time will tell.

Although gold prices haven't been able to break their new resistance level at $1,850, there is still a lot of bullish sentiment in the marketplace.

Once again, we are starting to hear calls that, with the rising inflation, real interest rates are headed deeper into negative territory, the precious metal could be headed back towards $2,000 an ounce by the end of the year.

That's it for this week. Have a great weekend.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.