(Kitco News) - The gold market is attracting renewed attention as inflation pressures were not as hot as expected, which could give the Federal Reserve room to cut interest rates later this year to support slowing economic activity.
The Consumer Price Index (CPI) jumped 0.9% in March, following a 0.3% increase in February, the U.S. Bureau of Labor Statistics announced on Friday. Although inflation picked up sharply last month, the increase was weaker than expected. According to consensus forecasts, economists were projecting a full 1% increase in consumer prices.
Over the last 12 months, headline inflation rose 3.3%, up from February’s reading of 2.4%. However, economists were looking for a 3.4% increase.
The report also showed that, despite the sharp rise in headline inflation, higher prices are not becoming embedded in the broader economy. Core CPI, which strips out volatile food and energy prices, rose 0.2% last month.
For the year, core inflation rose 2.6%, up from 2.5% reported in February.
Gold prices jumped more than $10 in their initial reaction to the latest inflation data and have managed to hold on to most of those gains. Spot gold last traded at $4,775.30 an ounce, up 0.21% on the day.
Analysts have said that investors need to watch resistance at $4,800 an ounce closely.
In an interview with Kitco News ahead of the CPI data, Tom Bruce, Macro Investment Strategist at Tanglewood Total Wealth Management, said that he wouldn’t be surprised to see a sharp rise in headline inflation; however, he added that the Federal Reserve still has a path to ease interest rates as long as core prices remain contained. He added that this would be positive for gold prices.
Analysts have been expecting to see a sharp rise in inflation pressures as the joint U.S.-Israel war with Iran has created significant supply chain issues, driving up energy and gas prices.
The report said that the gasoline index rose 21.2% last month and accounted for nearly three-quarters of the monthly all-items increase. In total, the energy index rose 10.9% last month and is up 12.5% over the last 12 months.
While inflation was lower than expected, some analysts have said that this is just the first warning shot, and consumers and the economy face some difficult headwinds.
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said that it’s only a matter of time before higher oil prices filter down to the broader economy. Despite a ceasefire announced earlier this week, he said that the war in Iran is still ongoing.
“The Fed is now staring down a nightmare scenario where headline pressures reaccelerate while growth slows. Expect "higher for longer" to get a fresh lease on life unless oil collapses sustainably, which looks highly unlikely anytime soon. Traders celebrating today may be in for a rude awakening in May,” he said.
Aslam added that he expects this environment to remain positive for gold.
“Persistent energy-driven inflation, unresolved war risks, and a Fed forced into delay mode all reinforce gold's role as the ultimate hedge against geopolitical chaos and eroding purchasing power. With oil shocks feeding through and safe-haven demand intact, expect renewed upside once the initial "soft miss" euphoria fades — gold thrives when real yields get capped and uncertainty reigns,” he said.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said that all current economic uncertainty hinges on the war with Iran.
“As we have been saying for the past month and a half, the duration of the war matters as does the extremely important Strait of Hormuz, because if the supply shock is temporary then the economy can weather this storm and the Fed will have an opportunity to lower interest rates by the end of the year, but if the inflation shock is more long-lasting they will have no choice but to sit on their hands for the entire year,” he said.
