(Kitco News) - The gold market is paring its earlier losses after U.S. inflation pressures cooled more than expected last month.
The headline Consumer Price Index (CPI) rose by 0.3% last month after August’s 0.4% increase, the U.S. Bureau of Labor Statistics announced on Friday. The inflation data was lower than expected, as economists were looking for another 0.4% increase.
The report noted that headline inflation rose by 3.0% over the last 12 months, lower than economists’ forecasts for a 3.1% reading, but above the 2.9% reported in August.
Core CPI, which strips out volatile food and energy prices, increased by 0.2% last month, lower than the 0.3% expectation and August’s 0.3% rise.
The report stated that annual core inflation rose by 3.0% last month. Economists were expecting to see an increase of 3.1%, the same as August’s print.
The gold market shot higher on the session following the latest inflation data. Spot gold last traded at $4,088.52 per ounce, down 0.86% on the day.
Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, referred to U.S. inflation as "the dog that didn’t bark."
"So many people have been expecting a sharp increase in inflation and have positioned bearishly as a result, but the market is likely to keep squeezing the shorts until they realize that the economy – and corporate America – is more resilient than many expected," Zaccarelli said. "We understand that valuations are high and there are risks in the market, but with the Fed cutting rates – and this report does nothing to stop them from a 25-bps cut next week – and corporate profits continuing to increase, it’s hard to see an interruption of this year’s bull market."
"Next year will bring new challenges, but we wouldn’t advise getting in the way of the upward trend between now and year-end," he added.
Aaron Hill, Chief Market Analyst at FP Markets, told Kitco News that the cooler inflation print had an immediate impact on precious metals and forex markets.
"With Core CPI at a chilly 0.2%, gold’s safe-haven appeal surges, potentially pushing XAU/USD $50-$100 higher from current levels, with $4,260 a distant bull target if momentum holds," Hill said. "The USD takes a beating—down 0.5-0.8% against majors—as markets cheer the cooling inflation signal. Traders are ditching the greenback for riskier assets, while gold bugs see this print as a springboard for a run at all-time highs by year-end."
U.S. inflation has become a complicated issue for the gold market. Elevated consumer prices forced the Federal Reserve to maintain a neutral monetary policy, keeping rates unchanged through 2025, which increases the opportunity costs of holding gold. However, high inflation is also increasing the risks that the U.S. could fall into a recession, which is supporting safe-haven demand for the precious metal.
However, a weakening labor market now has economists expecting the Fed to cut rates further this month despite sticky inflation in order to fulfill the other half of its mandate.
