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Gold price rises as inflation looks to have peaked

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(Kitco News) - The gold market is holding on to gains near session highs as inflation pressures look to have peaked, meeting economist expectations.

Wednesday The U.S. Labor Department said its U.S. Consumer Price Index rose 0.5% in July, after a 0.9% rise in June. The data was in line with consensus forecasts. For the year, the report said that headline inflation rose 5.4%.

Meanwhile, core CPI, which strips out food and energy costs, increased 0.3% last month, down from June’s 0.9% increase. The rise in inflation was weaker than expected. Economists were expecting to see an increase of 0.4%. For the year, core CPI is up 4.3%, the report said.

At first blush the weaker price pressure should be negative for gold, which is seen as an inflation hedge; however, the yellow metal is adding to its morning gains trading near session highs in initial reaction. December gold futures last traded at $1,746.60 an ounce, up 0.86% on the day.

Some markets analysts have said that although inflation pressures are weak, it gives the Federal Reserve room to maintain its ultra-accommodative monetary policies, which is supportive for the precious metal.

Adam Button, chief currency strategist at said that the U.S. dollar is losing some ground as the latest data reduces some expectation of Fed tightening.

“If inflation falls back down to target without the Fed hiking rates, why would they need to hike rates?” he said.

Avery Shenfeld, senior economist at CIBC, said that although inflation “has seen the mountaintop,” investors should expect to see a sharp decent anytime soon.

“Looking ahead, a stabilizing in oil prices and a likely drop in used car prices at some point will help cool the headline inflation rate, but production bottlenecks and shipping delays remain as upside threats in upcoming months,” he said. “But the more important issue for the Fed is that solid wage gains this year, ample consumer purchasing power, and tighter labour markets come 2022, could keep core inflation from descending enough to achieve the roughly 2% core PCE price pace that it has penciled in for next year.”

Rising gasoline prices helped to contribute to a strong rise in energy prices. The report said that the energy index rose 1.6% with the gasoline index rising 2.4%.

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