(Kitco News) - The gold market is selling off after the latest data showed U.S. producers saw rising price pressures on balance last month.
The headline Producer Price Index (PPI) posted a 0.4% increase in August, following July’s upwardly revised 0.1% reading, the U.S. Labor Department announced on Thursday. The latest headline data was in line with expectations, as economists looked for a 0.4% increase.
In the last 12 months, headline wholesale inflation increased 5.4%, the report said, above the consensus for 5.3% and July’s upwardly revised 4.8% reading.
Core PPI, which strips out volatile food and energy costs, rose 0.2% in August, below economists’ 0.3% consensus forecast and following June’s upwardly revised 0.3% reading. Annual core PPI rose 4.6%, in line with the consensus expectation and above July’s upwardly revised 4.3% print.
Gold prices fell sharply immediately after the 8:30 am ET data release. Spot gold last traded at $4,340.78 for a loss of 1.39% on the day.
PPI is viewed as a leading inflation indicator as producers pass higher input costs on to their customers.
Jeffrey Roach, Chief Economist for LPL Financial, said today's PPI report shows that despite the focus on the war with Iran, investors may be overlooking the growing impacts from China.
"China is no longer exporting deflation," he said. "After years of declining Chinese producer prices, current China pricing dynamics suggest China will now put upward pressure on both consumer and producer prices in the U.S."
"Tomorrow’s CPI report will be an important report before the Fed’s meeting next week and a 0.4/0.2 percent monthly rise shows inflation is running hot and will support the hawks on the committee," Roach said. "At this rate, a hike in rates next week appears likely."
Chris Zaccarelli, Chief Investment Officer for Northlight Asset Management, said today's PPI report had little effect on markets, but tomorrow's CPI will have a big impact on a divided Fed.
"With odds of around 65% of a rate hike next week, a lower-than-expected CPI number tomorrow could allow the Federal Reserve some breathing room and although there would be dissents, they could remain on hold until after the election," he said. "We are in a seasonally weak period of a midterm election year, which are two reasons why markets would struggle at this point (e.g. September is the weakest month on average and markets are typically soft leading up to an election), not to mention we are in the 4th year of a bull market that has returned double-digits every year, so it shouldn’t take much to keep markets down."
"However, benign inflation data tomorrow could provide a spark to the late Summer / early Fall doldrums, so we are waiting to see what the CPI data shows on Friday."
