(Kitco News) - The gold market remains in a difficult position as it continues to test resistance near $4,700 an ounce. At the same time, rising inflation appears to be becoming embedded in the broader economy, which could force the Federal Reserve to take a more hawkish stance on monetary policy.
The Consumer Price Index (CPI) rose 0.6% in April, following a 0.9% increase in March, the U.S. Bureau of Labor Statistics announced Tuesday. The inflation data were in line with economists’ expectations.
Over the past 12 months, headline inflation climbed 3.8%, sharply higher than the previous month’s reading of 3.3%. Annual inflation also came in hotter than expected, as economists forecasted a 3.7% increase.
Meanwhile, core CPI, which strips out volatile food and energy prices, rose 0.4% last month, up from 0.2% in March. Core inflation also exceeded expectations, as consensus forecasts had called for a 0.3% increase.
Over the past 12 months, annual core inflation rose 2.8%, up from 2.6% reported in March.
Although the inflation data created a headwind for gold, the precious metal continued to test a key near-term resistance level in its initial reaction to the latest economic data. Spot gold last traded at $4,703.20 an ounce, down 0.66% on the day.
According to some analysts, gold is holding up relatively well following the inflation data because of growing fears that the Federal Reserve’s monetary policy is becoming trapped as stagflation concerns re-emerge in the marketplace.
The inflation data are prompting markets to price in tighter monetary policy by year-end, with the probability of a rate hike reaching its highest level so far this year. However, higher interest rates would threaten to push the already fragile economy into a recession.
Analysts note that inflation continues to be driven by severe supply-side constraints, which U.S. monetary policy cannot resolve.
The report also noted that rising energy prices remain the biggest driver of higher consumer costs. The ongoing war in Iran has significantly disrupted global energy markets, pushing oil prices higher. According to the report, the energy index rose 3.8% last month, accounting for more than 40% of the increase in consumer prices.
For the year, energy prices are up 17.9%.
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said that with inflation pressures increasing, at best, the Federal Reserve is now on hold for the rest of the year.
“Given that inflation is heading in the wrong direction and the labor market is holding up, it’s very unlikely that the Fed will be able to lower interest rates any time soon and it’s possible that we may start pricing in rate hikes for next year,” he said.
