The gold market continues to face modest selling pressure but is holding above $3,400 an ounce as elevated inflation remains a threat to economic activity.
The Core Personal Consumption Expenditures (PCE) index—which excludes volatile food and energy prices and is the Federal Reserve’s preferred inflation gauge—rose 0.3% in July, following a similar increase in June, the U.S. Department of Commerce reported Friday. Consumer prices rose in line with consensus estimates.
At the same time, inflation pressures remain elevated. The report showed that core inflation rose 2.9% over the past 12 months, in line with expectations.
Although rising inflation is traditionally negative for gold, the precious metal is holding firm as higher consumer prices have not altered expectations for a Federal Reserve interest rate cut next month. Spot gold last traded at $3,411 an ounce, down 0.15% on the day.
Some analysts note that, in the current environment, rising inflation could work in gold’s favor. Higher inflation, coupled with expected monetary policy easing, is expected to drive real interest rates sharply lower, reducing gold’s opportunity costs as a non-yielding asset.
According to the CME FedWatch Tool, markets continue to see a better than 80% chance of a rate cut next month, even as inflation creeps higher.
While core inflation continues to rise, the report noted that headline consumer prices remain relatively stable, increasing 0.2% in July, in line with expectations.
For the year, headline inflation rose 2.6%, unchanged from the previous month.
Looking beyond inflation, the report showed relatively stable consumption. Personal spending rose 0.5%, following June’s revised increase of 0.4%, again matching expectations.
At the same time, personal income increased 0.4% last month, also in line with expectations.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said that he expects the latest inflation data will not stop the Federal Reserve from cutting rates next month.
“There are another two important inflation reports before next month’s meeting – PPI and CPI on 9/10-9/11 – but as long as those reports don’t show a huge spike in inflation, the Fed will be almost guaranteed to cut interest rates by 0.25%,” he said.
