(Kitco News) - The gold market is holding gains above $5,200, but according to some analysts, it could face headwinds as the U.S. inflation threat is far from over following a strong rise in producer prices.
The headline Producer Price Index (PPI) rose 0.5% in January, following December’s 0.4% increase, the U.S. Labor Department announced Friday. The latest inflation data came in hotter than expected, with economists forecasting a 0.3% rise.
Over the past 12 months, headline wholesale inflation increased 2.9%, the report said.
Core PPI, which strips out volatile food and energy costs, rose 0.8% last month—well above economists’ 0.3% consensus forecast—following November’s reading. Annual core PPI data suggest wholesale inflation is becoming embedded in the broader economy, with prices rising 3.6%; economists had expected an increase of 3.0%.
The gold market is not seeing any significant reaction to the latest inflation data. Spot gold was last traded at $5,218.20 an ounce, up 0.66% on the day. Although gold continues to benefit from safe-haven flows ahead of the weekend, some analysts have said that higher inflation could force the Federal Reserve to delay its expected rate cuts.
However, not all analysts are convinced that stubborn inflation will keep the Federal Reserve from cutting rates. Ahead of the PPI data, Chantelle Schieven, Head of Research at Capitalight Research, said in an interview with Kitco News that if the U.S. economy continues to weaken, the central bank will have no choice but to cut rates, even if inflation remains elevated.
She added that this would be a strong environment for gold, as higher inflation and rate cuts would reduce gold’s opportunity costs. She also said that gold remains an attractive safe-haven asset, as higher inflation and low growth should take their toll on equity markets.
PPI is considered a leading inflation indicator, as producers pass higher input costs on to consumers.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said that while inflation hasn’t been on investors’ radar for some time, Friday’s sharp increase in wholesale prices could spook equity markets.
“For the past month, the market has been worried about AI disruption and its impact on the labor market, so inflation hasn’t been top of mind. But this morning’s inflation readings could give the Fed another reason to be more patient with rate cuts and wait until the second half of the year before making any changes,” he said.
