(Kitco News) - The gold market is holding on to solid gains, but prices are not seeing any new momentum, as the latest inflation data provide no direction for the Federal Reserve's monetary policy.
Friday, The U.S. Department of Commerce said its core Personal Consumption Expenditures Price Index, which strips out volatile food and energy prices, increased 0.1% last month, compared to April’s revised 0.3% increase. The data was in line with expectations.
In the last 12 months, core PCE rose 2.6%, down from 2.8% reported in April; annual inflation dropped in line with expectations.
The gold market is testing the top of its range but still remains capped below $2,350 an ounce in initial reaction to the inflation data. August gold futures last traded at $2,348.60 an ounce, down 0.51% on the day.
Although the data doesn’t add any new element to the current narrative in the marketplace, some market analysts expect that it will provide some support for the Federal Reserve as it looks to cut interest rates at some point this year.
“There are no big surprises in the headlines. They are in line with estimates while the variation in the income and spending numbers are small, and the revisions aren't material,” said Adam Button, Head of Currency Strategy at Forexlive.com. “I think the Fed will look favorably at this report as it helps to confirm softer CPI, and the core services numbers are also benign.”
Michael Brown, Senior Research Strategist at Pepperstone, also noted that the latest inflation data does not provide any conclusive direction. He added that he expects the Federal Reserve to maintain its aggressive monetary policy stance as the inflation path remains “bumpy.”
“It remains the case that 'one swallow doesn't make a summer,' hence the May PCE figures are unlikely to open the door to a cut on their own, though do push said door ajar a little more,” he said. “Policymakers are, for now, set to remain relatively cautious in the pace of normalisation, being reluctant to take a premature 'victory lap,' likely still wishing to err on the side of keeping policy 'tighter for longer,' to ensure that the battle against inflation is definitively won.”
Looking at headline inflation, the report said that PCE was unchanged last month, compared to April’s 0.3% increase.
For the year headline inflation rose to 2.6%, down from April’s reading of 2.7%.
Although inflation pressures are relatively benign, the report did show that consumption is slowing, which might not bode well for economic activity heading into the second half of the year.
The report said that personal consumption increased 0.2% last month, up from April’s downwardly revised increase of 0.1%. The data missed expectations as economists were looking for a 0.3% increase.
Meanwhile, consumers appear to be saving more as personal income rose 0.5% last month, up from 0.3% in April. Economists were looking for a 0.4% increase.
