(Kitco News) - Gold prices have fallen to session lows, testing critical support as hotter-than-expected U.S. inflation data reinforces expectations that the Federal Reserve will have to raise interest rates by year-end, increasing the opportunity cost of holding the non-yielding precious metal.
At the same time, higher energy prices are becoming embedded in the broader economy, which some economists have said could force interest rates to remain higher for longer.
The Consumer Price Index (CPI) rose by 0.6% last month, following August’s 0.4% increase, the U.S. Bureau of Labor Statistics announced Wednesday. The monthly inflation data came in line with market expectations.
However, elevated energy prices continue to take their toll. The report noted that headline inflation rose by 3.7% over the last 12 months, up from the 3.4% reported in August. Economists had expected annual inflation to rise to 3.6%.
Core inflation, which strips out volatile food and energy prices, appears to be garnering the most attention after rising more than expected. Core CPI increased by 0.3% last month, matching August’s 0.3% rise.
The report stated that annual core inflation rose to 2.6% last month, up from August's 2.4% increase. Economists had expected annual core inflation to rise to 2.5%.
Gold is struggling in the face of growing inflation fears and is testing a critical support level. Spot gold last traded at $4,107.30 an ounce, down more than 1% on the day.
Artem Bakushev, Head of Risk at Monaxa, noted that gold is selling off as the U.S. dollar, Treasury yields and real yields rise, with the latest inflation report showing that the Fed still has more work to do to bring inflation down to its 2% target.
“The dollar is surging on the back of it, ripping higher as traders violently reprice how much room the Fed genuinely has to keep cutting into year-end,” he said. “For policymakers, this is the print that hands the hawks genuine ammunition and makes the next meeting’s decision considerably harder to call, with gold, the dollar and yields all left to fight out the new narrative in real time.”
In a note, Adam Button, Chief Market Analyst at InvestingLive.com, said that before the report, markets were pricing in a 21% chance of an interest rate hike in October and a total of 27 basis points of tightening by year-end. However, expectations have now shifted, with the probability of an October hike rising to 47% and a total of 36 basis points of tightening priced in for the remainder of the year.
Looking at the components of the report, energy prices had an outsized impact on consumer prices, as expected. The report said the gasoline index rose 9.1% in September, accounting for more than half of the monthly headline increase. The overall energy index increased 5.2% last month, following a 2.1% increase in August.
The report also noted a 0.4% increase in shelter costs last month.
Meanwhile, the report highlighted broad-based price increases across core components, including recreation, used cars and trucks, education, airline fares, medical care and apparel.
Jeffrey Roach, Chief Economist at LPL Financial, said the report indicates that inflation pressures are broadening beyond energy.
“Inflation pressures are broadening beyond energy, suggesting the last mile back to target could remain bumpy and keep interest rates elevated. The latest report complicates the Fed’s decision this month, as the road back to price stability is looking increasingly difficult to navigate,” he said.
