U.S. consumer prices edged up by only 0.1 percent in April, however, core CPI increased 1.8 percent on an annual basis. How can it affect the Fed’s decision on an initial rate hike and the gold market?
According to the U.S. Bureau of Labor Statistics, U.S. consumer prices increased 0.1 percent in April month over month. It was a small rise, however the core CPI, which excludes volatile food and energy costs (the former were unchanged, and the latter declined by 1.3 percent), jumped by 0.3 percent. On an annual basis, consumer prices declined by 0.2 percent, however, the core CPI increased by 1.8 percent (the same rate as in March), which is not so far from the Fed’s general inflation target of 2.0 percent.
Does it mean that the last reading of inflation can accelerate the interest rate hike? We don’t think so, because prices are rising only because of medical care costs and rents. Healthcare costs jumped by 0.9 percent in April, while shelter costs rose by 0.3 percent.
Why are the medical costs increasing? Thanks to the Obamacare. Surging premiums of plans sold under the new federal health law (ironically called the Patient Protection and Affordable Care Act) reflect the rising costs of providing care and the increase in prescription prices. It is true that some are provided with subsidies to protect them from the premium increases, however, many people have to absorb these increases without any help from Uncle Sam. According to the Obama administration, premiums could rise as much as 20 percent this year, while The Wall Street Journal claims that many health insurers seek rate boosts up to 50 percent.
And we also have the easy monetary policy, which is the reason behind the rise in rents. This is also not good news for the U.S. economy, since higher rents may reflect that property prices are at such prohibitive levels that more and more people decide to rent a house or flat instead of buying it. It may also signal the tightening of credit and an economic slowdown, since yields (rent to price ratio) were falling for many years before the current move up. Similarly, the rise in used cars costs jumped 0.6 percent in April, which may reflect that people are switching to used cars instead of new ones. To sum up, it should not be surprising now that consumers are not increasing their spending. All they save on the energy costs, they spend on rising healthcare or rents. The lack of strength in consumer spending should make the FOMC members think twice before increasing interest rates. So the current inflation is not the kind of “healthy” wage-growth-driven inflation liked by the Fed, but it is a completely different animal caused by not so healthy developments in healthcare and real estate markets. It should be good news for the gold market, since the yellow metal behaves relatively well during economic slowdowns with low interest rates.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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