(Kitco News) The market is no longer convinced that inflation may be as transient as the Federal Reserve does, after US consumer prices rose 6.2% year-on-year in October – the warmest reading since 1990.
In response to the data, gold jumped nearly $ 40 a day, with December Comex futures last trade at $ 1,87.50, up 2% on Wednesday. Shares, on the other hand, fell as the risk-off mood spread.
On a monthly basis, Consumer Price Index (CPI) increased by 0.9%, the largest increase in four months. The core CPI, which eliminates food and energy costs, also rose 4.6% year-on-year, the largest increase since August 1991.
Looking more closely at price increases, energy, shelter and food costs were the main drivers in October. Food increased by 5.3% from a year ago – the largest increase since January 2009. Petrol prices rose by 6.1%, the largest increase since March. Fuel oil saw the largest increase since 2007, up 12.3% from the previous month. And electricity costs rose 1.8%, the largest monthly increase in seven years.
“Below the surface, over 80% of CPI sub-components were above 2%, the highest since 1991, indicating wider price increases, not just related to reopening. The bond market tells you that the Fed is far behind the curve of policy as short-term interest rates rose sharply “while long-term interest rates have taken the release in stride. A flattening curve does not bode well for risk assets into next year,” said Cliff Hodge, Cornerstone Wealth’s chief investment officer.
In recent comments from US officials, Treasury Secretary Janet Yellen tried to calm the markets on Tuesday, saying that increased price pressure will not last. Yellen added that the Fed is also ready to act if necessary to prevent inflation in the 1970s.
“I would expect price increases to flatten out and we will go back to inflation that is closer to the 2% we consider normal,” as the pandemic disappears, Yellen told National Public Radio’s Marketplace ‘show .
Yellen noted that she does not see inflation continuing beyond next year as the economy and demand return to normal.
The 1970s scenario is not repeating itself, Yellen pointed out, explaining that five decades ago, “people thought politicians would not bring it to an end, and inflation expectations were embedded in the American psyche … It does not happen now , and the Federal Reserve would not allow that to happen. “
However, economists do not now rule out inflation rising to 7% on an annual basis in the short term.
“Inflation in the US once again exceeded expectations by a wide margin. Headline and core interest rates are now at 30-year highs with short-term momentum, indicating that 7% is possible. Price pressure in the pipelines shows little sign of easing , and inflation expectations are rising as well, leading us to conclude that the downsizing of QE will be accelerated and interest rate hikes will come faster, “said ING chief economist James Knightley.
Inflation data from October appear to be the trigger the gold has been waiting for for months, with investors now aggressively seeking it as an inflation hedge. On a technical basis, the precious metal has finally broken above the critical resistance level of $ 1,830, which could open the door to $ 1,900 per barrel. ounce.
“Gold prices are pushing through the multi-month downward trend formed from all-time highs in the midst of stronger-than-expected inflation data, fueling a push for inflation protection while central bank price pricing remains volatile,” said strategists. at TD Securities. “An outbreak north of the multi-month downward trend could also help reverse the trend of ETF outflows, making gold prices even higher.”
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