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Inflation is still a threat even if it has peaked

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(Kitco News) - Inflation continues to dominate market headlines as consumers feel the real-world effects of rising prices.

Friday, consumers got a little bit of good news after the U.S. Department of Commerce said core Personal Consumption Expenditures Index, the Federal Reserve's preferred inflation measure, saw an annual rise of 4.9%, down from March's 5.2% increase. Inflation has dropped from February's high of 5.3%.

Also, on the inflation front, in its latest consumer survey, the New York Federal Reserve noted that while consumers see prices rising this year, three-year and five-year inflation expectations remain anchored albeit still elevated.

On paper, this is good news; however, consumers will continue to face a lot of pain as prices remain elevated for the foreseeable future. Earlier this week, the Federal Reserve acknowledged that consumers are facing hardships as inflation erodes their purchasing power, wealth and weighs on economic growth.

In a recent interview with Kitco News, Axel Merk, President and Chief Investment Officer, described the Federal Reserve's precarious position as walking along a very narrow cliff edge. While the central bank would like to get inflation under control, it won't risk creating a recession, something that markets have been increasingly worried about.

Wednesday, the Federal Reserve signaled that its aggressive action only includes raising interest rates by 50 basis points at the next couple of meetings. Many analysts and economists have said that if the central bank were serious about getting inflation under control, they would be taking more aggressive action.

Inflation to remain high this year but cools over the next five years - New York Federal Reserve

In a flurry of tweets, Tuesday, billionaire investor Bill Ackman, founder of Pershing Square Capital Management, said that the U.S. central bank needs to act aggressively now.

"Until inflation is satisfactorily addressed, investors don't know if and how long it will take the Fed to quell inflation. Uncertainty is the enemy of markets, particularly in the short term," Ackman said on social media. "By raising rates aggressively now, the Fed can protect and enhance equity markets and the strength of the economy for all, while stymieing inflation that destroys livelihoods, particularly that of the least fortunate."

However, the latest paper inflation reading gives the Federal Reserve some breathing room, so they will continue to talk tough but still remain behind the inflation curve. In the meantime, volatility will remain high and financial markets will be messy.

Analysts have warned investors that equity markets will remain fragile in the current environment. The comments come as the S&P 500 looks to send a seven-week losing streak rising 6% this week; however, analysts warn that inflation remains a threat, and many are looking to sell rallies in a weak economic growth environment.

While gold will face challenging headwinds from rising interest rates, its role as a safe-haven asset and inflation hedge is far from over.

Merk had the best description for gold's role in a portfolio.

"Gold is always that asset that you're happy that you had yesterday. But you have no idea why you would have it for tomorrow," he said.

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.