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(Kitco News) - The gold market is holding on to early morning gains but is struggling to hold a break above $1,980 an ounce as U.S. consumers see a mixed bag of inflation pressures.
Tuesday, the U.S. Labor Department said its much-anticipated Consumer Price Index rose 0.1% last month after a 0.4% increase in April. 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 4.0% last month, continuing the moderating trend. Economists were expecting to see a rise of 4.1%. Inflation has seen its slowest increase in nearly two years.
While headline inflation continues to cool, the report noted that core inflation, which strips out volatile food and energy prices, remains stubbornly elevated, rising 0.4%, in line with expectations.
For the year, core inflation rose 5.3%, the report said.
The gold market attracted some bullish momentum in initial reaction to the latest inflation data; however, persistently high core inflation is keeping the rally in check. August gold futures last traded at $1,981.80 an ounce, up 0.56% on the day.
While headline pressures continue to cool more than expected, some economists and analysts have said that elevated core inflation shows that higher consumer prices are becoming embedded in the broader economy, which could force the Federal Reserve to maintain its aggressive monetary policy stance and raise interest rates higher through the summer.
The CME FedWatch Tool shows that markets see a 75.8% chance of the Federal Reserve leaving interest rates unchanged Wednesday. However, markets see a 64.2% chance of a rate hike in July. There is also a nearly 6% chance of an outsized 50-basis point move next month.
Nigel Green, the CEO and founder of deVere Group, said that while inflation is on the right track, trending lower, it is still well away from the central bank's 2% target.
“Inflation is certainly coming down so far, but it is very, very gradual. It remains sticky and a long way from the 2% target, largely due to a tight labor market," he said. “Therefore, investors need to brace for at least another interest rate hike this year, even if the Fed skips this one.”
However, other analysts note that a slowing economy and waning earnings pressures will eventually push core inflation down.
"The core numbers are stubbornly high, but the cherry on top is the fall in earnings and the revision lower in last month's earnings data," said Adam Button, chief currency strategist at Forexlive.com.
Naeem Aslam, chief investment officer of Zaye Capital Markets, said after this inflation report, the Federal Reserve should look at taking the summer off.
"The data is showing that inflation is slowing down and it is moving in the direction. Traders are already expecting some kind of a pause from the Fed or at least some hints coming in their meeting which is planned tomorrow," he said. "In simple terms, it seems like there is less wood to chop for the Fed as inflation begins to cool down."
In a breakdown of consumer prices, the report said that shelter costs and used car prices were the biggest contributors to last month's inflation pressures. Meanwhile food prices increased 0.2%. Annually, food prices are up 6.7%
Consumers also saw a broad-based drop in energy prices with the energy index falling 3.6% last month. For the year energy prices are up 11.7%, the report said.
