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Gold price hits session highs as U.S. CPI sees annual inflation rising 5%, down sharply from 2020 highs

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(Kitco News) - The gold market has pushed back to session highs as inflation cool more than expected in March, which according to some analysts, will give the Federal Reserve room to end its aggressive monetary policy tightening, even if there is one more hike still in play.

Wednesday, the U.S. Labor Department said its much-anticipated Consumer Price Index rose 0.1% last month after a revised 0.4% increase in February. The data was weaker than expected, with consensus forecasts looking for a 0.2% increase.

The report said that in the last 12 months, consumer prices rose 5.0% last month, continuing the moderating trend. Economists were expecting to see a rise of 5.1%.

"This was the smallest 12-month increase since the period ending May 2021," the report said.

Core CPI, which strips out volatile food and energy prices, rose by 0.4% last month. The core numbers were in line with expectations.

For the year, core inflation rose 5.6%, unchanged from February, the report said. Although headline inflation has dropped, some analsyts note that persitently high core inflation continue to highlight an economy entrenched with elevated consumer prices.

"Even with March retail sales and industrial production expected to show weakness in the reports later this week, with employment growth still solid and core inflation still elevated, the odds are rising that the Fed will push on with another final 25bp rate hike at its next policy meeting," said Paul Ashworth, chief North America economist at Capital Economcs.

Although markets see solid potential for the Federal Reserve to raise interest rates by 25 basis points next month, expectations have come down sharply in initial reaction to the inflation data.

Shifting expectations surrounding the Federal Reserve's monetary policies continue to support gold prices. June gold last traded at $2,042.50 an ounce, up more than 1% on the day.

"The market was pricing in a 75% chance of a 25-bps hike on May 3 and that's ticked down to 67%. There is plenty of good news here with the headline undershooting and the important parts of core inflation also falling," said Adam Button, chief currency strategist at "The U.S. dollar is lower across the board here as it begins to look like the Fed is getting the upper hand on inflation."

At the same time, markets also firmly believe that the Federal Reserve will cut interest rates before the end of the year.

Nicky Shiels, head of metals strategy at MKS PAMP, said that there is not much holding gold back after this inflation data. She added the Fed is unlikely to extend its rate hiking cycle after May.

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