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(Kitco News) - The gold market has jumped to session highs as headline consumer inflation pressures cool more than expected in April, even as core inflation remains stubbornly elevated.
Wednesday, the U.S. Labor Department said its much-anticipated Consumer Price Index rose 0.4% last month after increasing 0.1% in March. The data was in line with consensus expectations.
The report said that in the last 12 months, consumer prices rose 4.9% last month, continuing the moderating trend. Economists were expecting to see a rise of 5.0%.
"This was the smallest 12-month increase since the period ending April 2021," the report said.
This is the tenth consecutive month inflation has dropped from its peak last summer.
Gold is seeing some renewed buying momentum because analysts have said that inflation below 5% would give the Federal Reserve room to pause its aggressive monetary policy tightening. June gold futures last traded at $2,052.40 an ounce, up 0.47% on the day.
"The CPI report falls slightly into the camp of the U.S. monetary policy doves, who want to see the Federal Reserve stop raising interest rates sooner," said Jim Wyckoff, senior market strategist at Kitco.com.
However, some analysts warn that gold still has a difficult path to follow as core CPI remains elevated, indicating that higher consumer prices are becoming embedded in the broader economy.
The report said that core inflation, which strips out volatile food and energy prices, rose 0.4% last month, compared to March's 0.4% increase. Core CPI rose 5.5% for the year, down a tick from 5.6% in March.
Economists note that headline inflation is now below Fed Fund futures, which the central bank increased to between 5.00% and 5.25% last week. Some analysts said that positive real rates could weigh on gold as it raises the precious metal's opportunity costs as a non-yielding asset.
The latest inflation data has only slightly impacted market expectations regarding the Federal Reserve's monetary policy. According to the CME FedWatch Tool, markets see the central bank holding rates steady through the summer. Markets are pricing in a potential rate cut in September, with rates ending the year roughly 100 basis points lower from current levels.
While the Federal Reserve may no longer be in a hurry to raise interest rates again, Andrew Hunter, deputy chief U.S. economist at Capital Economics said that sticky core inflation means they will not be cutting rates anytime soon.
“The lack of downward pressure on [core inflation] remains a concern, particularly when it is the measure Fed officials are watching most closely. That said, as the easing in labor market conditions evident in the JOLTS and survey data starts to feed through, we still think core services inflation will start to ease more markedly soon,” he said.
According to the report, shelter costs was the biggest driver of consumer inflation last month followed by an increase in used car prices and higher gasoline prices.
According to components of the report the energy index rose 0.6% last month with gasoline prices more than offsetting declines in other sectors of the energy market.
At the same time, food prices were relatively unchanged from March.
