(Kitco News) - The gold market is selling off after the latest data shows U.S. producers saw surprisingly strong price pressures last month.
The Producer Price Index (PPI) rose 0.2% in June, following May’s 0.2% decrease, the U.S. Labor Department announced on Friday. The latest inflation data was higher than expected, as economists looked for a 0.1% increase.
In the last 12 months headline wholesale inflation increased 2.6%, the report said, which was well above the consensus for a 2.3% reading.
Core PPI, which strips out volatile food and energy costs, rose 0.4% in June against economists’ forecasts for a 0.2% increase and following May’s flat reading. Annual core PPI was 3.0% against the consensus expectation for a 2.5% reading and following May’s 2.3% print.
The gold market is selling off on the worse-than-expected inflation data. Spot gold fell sharply below $2,400 per ounce in the moments following the PPi release, last trading at $2,397.13 for a loss of 0.76% on the day.
PPI is viewed as a leading inflation indicator as producers pass higher input costs on to their customers.
Paul Ashworth, Chief North America Economist at Capital Economics, said the PPI report is actually a lot better than it looks.
"Ignore the fact that core PPI increased by a slightly bigger-than-expected 0.4% m/m in June and that May was revised to a 0.3% rise from unchanged," he wrote in a note shared with Kitco News. "The PPI components that feed into the Fed’s preferred PCE deflator inflation measure were significantly lower than expected for June and it looks like May’s PCE gain could be revised down too, albeit only slightly."
"The big news is that, after applying our own seasonal adjustment, PPI hospital prices increased by only 0.1% m/m in June and the massive 1.3% m/m surge in May was revised down to a 0.6% gain," Ashworth added. "In addition, after rising by 0.8% m/m in May, PPI office of physicians prices fell by 0.4% m/m in June. Portfolio management prices only increased by 1.0% m/m in June, which barely reversed the 0.8% gain in May. Admittedly, PPI international air transportation prices rebounded strongly, but prices on domestic routes continued to fall, echoing what we learned in June’s CPI report."
"The upshot is that our post-CPI estimate that the core PCE deflator increased by 0.19% m/m in June has, post-PPI, been cut to only 0.12% m/m," he concluded. "In addition, we think that May’s increase could be trimmed from 0.08% to 0.05%. That would be enough to pull the annual core PCE inflation rate down to 2.5%, from 2.6%, with the 3m annualised growth rate dropping back to 1.8%, from 2.7%."
"September rate cut on the way – and we can’t completely rule out a surprise move in July."
Market analysts have said that falling producer prices, combined with improving CPI inflation, could give the Federal Reserve the confidence to begin lowering interest rates as early as September, supporting gold’s long-term uptrend.
