This week, a lot of interesting economic data was published. Retail sales barely rose, while the Consumer Price Index fell 0.2 percent in September. What does it mean for the U.S. economy and the gold market?
Retail sales rose just 0.1 percent last month. And after revision, the initial gain transformed into lack of any increase in August. Retail sales were supported by strong auto sales (1.7 percent jump), as retail sales excluding motor vehicles dropped 0.3 percent, the second drop in a row and the biggest decline since January. After the publication, the GDPNow model nowcast for real GDP growth in the third quarter of 2015 dropped from 1.0 percent on October 9 to 0.9 percent. The Fed hike is becoming less and less likely this year.
The inflation dynamics also does not make the case for tightening monetary policy. The CPI declined 0.2 percent in September, for the second month in a row. Over the 12 months, the CPI was essentially unchanged. It must be a nightmare for the central bank to be unable to generate inflation (see the chart below).
Chart 1: Consumer Price Index (percent change from year ago) between September 2005 and September 2015
However, the core index, which excludes food and energy prices, rose 0.2 percent in September and 1.9 percent on an annual basis, the highest level since July 2014 (as one can see in the chart below). Therefore, the lack of inflation is not true and Fed could hike interest rates if it really wants it. Actually, excluding energy there is quite impressive inflation over the last year. Food prices increased 1.6 percent, while the shelter index rose 3.2 percent on an annual basis with the rent index up 3.7 percent. Therefore, there has been inflation over the last year, but it has been affecting mainly asset and house prices, which are not included (directly and properly) in the CPI.
Chart 2: Core Consumer Price Index (percent change from year ago) between September 2005 and September 2015
The key takeaway is that the lack of CPI inflation (but not core CPI inflation) and weak retail sales in September make the Fed interest rate hike less likely to happen this year. This is good news for the gold market, because slower and more gradual tightening means less upward pressure on the U.S. dollar and real interest rates, which are negatively related to the price of gold.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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