(Kitco News) - Gold continues to hold solid support above $3,200 an ounce and could see further upside momentum as weak inflation data gives the Federal Reserve room to cut interest rates to support the faltering U.S. economy.
The Consumer Price Index (CPI) rose 0.2% last month following a 0.1% decline in March, the U.S. Bureau of Labor Statistics announced on Tuesday. The inflation data came in cooler than expected, as economists had forecast a 0.3% increase.
The report noted that headline inflation rose by 2.3% over the past 12 months, down from the 2.4% reported in March. Economists had expected annual inflation to remain unchanged.
“The April change was the smallest 12-month increase in the all items index since February 2021,” the report said.
Core CPI, which excludes volatile food and energy prices, also rose 0.2% last month, coming in cooler than expected. Economists had projected a 0.3% increase in core consumer prices.
On an annual basis, core CPI remains stubbornly elevated at 2.8%, unchanged from the previous month.
The gold market is seeing modest buying momentum in its initial reaction to the latest inflation data; however, prices remain confined to a narrow range. Spot gold last traded at $3,244.90 an ounce, up 0.25% on the day.
Although analysts do not expect the latest inflation data to push the Federal Reserve out of its current neutral stance, some economists say it gives the central bank room to act if economic data continues to weaken.
Some analysts have also noted that improved trade talks between China and the U.S., along with lower tariffs for the next 90 days, continue to have a greater impact on market sentiment than the economic data.
Looking at broader inflation trends, the report said rising shelter costs were the biggest driver of consumer prices last month. The shelter index rose 0.3%, accounting for more than half of the total monthly increase.
Meanwhile, weaker energy prices continue to provide some relief for consumers. The report noted that the energy index fell 3.7% in April.
Jeffrey Roach, Chief Economist for LPL Financial, noted that although sentiment has improved, global financial markets still face a lot of uncertainty.
“Improvements in global trade will provide some clarity on the future path of inflation. However, the uncertainty about what might happen after these temporary trade deals makes things difficult for the Fed since stagflation remains a risk. If the fog does not clear, the Fed might not be able to adjust policy in June,” he said in a note.
