(Kitco News) - The gold market is seeing some solid selling pressure as U.S. consumer prices rose sharply last month, shifting expectations that the Federal Reserve will be able to cut interest rates anytime soon.
The Consumer Price Index (CPI) rose 0.5% last month after December’s 0.4% increase, the U.S. Bureau of Labor Statistics announced on Wednesday. The inflation data was significantly hotter than expected. Economists were looking for a 0.3% increase in consumer prices.
The report noted that, over the last 12 months, headline inflation rose 3.0%; according to consensus forecasts, economists were calling for an unchanged reading at 2.9%.
The report also noted that higher prices are becoming embedded in the broader economy. Core inflation, which strips out volatile food and energy prices rose 0.4% last month. Economists forecasted a 0.% increase.
The gold market is seeing consistent selling pressure in its initial reaction to the hotter-than-expected inflation data. Spot gold last traded at $2,865.90 an ounce, down 1% on the day.
It’s not only the inflation data that is creating some headwinds for the precious metal, but its rally to consecutive record highs is also prompting some investors to take profits after prices briefly pushed above $2,900 an ounce earlier in the week.
Although gold prices remain in a solid uptrend, some analysts have said that its latest rally has placed the market in overbought territory and could be sensitive to moves in U.S. bond markets and the U.S. dollar, which have both moved higher following the CPI data.
According to some analysts, the latest inflation data presents new challenges for gold as it puts the Federal Reserve in a difficult position, forcing it to maintain elevated interest rates.
Tuesday, in his first day of testimony before Congress, Federal Reserve Chair Jerome Powell, reiterated to the Senate Banking Committee the central bank’s stance that it is in no hurry to cut interest rates as inflation remains elevated and the labor market remains healthy.
“Any rate reductions in the first half of 2025 now seem highly unlikely, while the December ‘dot plot’ median projection for a total of 50bp of cuts this year is now in some doubt, particularly with money markets now discounting just one 25bp cut over the next eleven months,” said Michael Brown, Senior Research Analyst at Pepperstone, in a note following the inflation data.
Looking at inflation pressures, the report said that housing costs were the biggest driver last month. The Shelter Index rose 0.4% in January, accounting for nearly 30% of the monthly headline increase.
The report also noted a rise in energy and food costs. The energy index rose 1.1%, driven by higher gasoline prices; meanwhile, the food index rose 0.4% last month.
The report also noted broad-based price increases in core inflation.
“Indexes that increased over the month include motor vehicle insurance, recreation, used cars and trucks, medical care, communication, and airline fares,” the report said.
