According to the U.S. Department of Labor, the Consumer Price Index (CPI) rose by 0.2 percent in February, the first time in four months. Does it mean that inflation is rising, which would bring us closer to the Fed’s hike? How can this data affect the gold market?

The index for all items less food and energy experienced the same increase in February as the Consumer Price Index for All Urban Consumers (CPI-U), i.e., 0.2 percent on a seasonally adjusted basis. This rise reflects the stabilization of the oil prices at around $50 per barrel (WTI).

On an annual basis, there has been zero overall inflation in the last 12 months, while core inflation, i.e., with food and energy excluded, has risen by 1.7 percent. However, please note that the seasonally adjusted year-on-year CPI is negative for the second month (-0.17 percent) and that the chained Consumer Price Index for All Urban Consumers (C-CPI-U), which is considered by the U.S. Bureau of Labor Statistics as a closer approximation of a cost-of-living index than other CPI measures, has also decreased (by 0.5 percent) over the last 12 months.

Undoubtedly, the stable (even low) oil and gasoline prices would cease to exert downward pressure on the U.S. CPI. However, we believe that the inflation rate will not rebound in March, due to a rise in the U.S. Dollar Index (stronger greenback means cheaper import prices) and further declines in the oil prices.

Moreover, when you look at the long-term chart (Figure 1), you will see that even the core U.S. CPI, which is used by monetary policymakers to assess the underlying trend in inflation, is below the pre-recession level and has been declining for the last couple of years. And the signs of the coming recession, like weak economic activity (measured, for example, by manufacturing new orders) or the decline in the Producer Price Index, suggest that the inflation rate will not rise significantly, even if the oil prices stabilize. In the 2008-2009 years, core inflation was declining in tandem with the overall CPI.

Figure 1: The core CPI (excluded food and energy) from 2006 to 2015.

The same trend is seen in the market expectations of future inflation measured as the difference between the yield on 10-year Treasury securities not indexed to the inflation rate and the yield on 10-year Treasury securities indexed to the inflation rate (see Figure 2).

Figure 2: The difference between the yield on 10-year Treasury securities, constant maturity, and the yield on 10-year inflation-indexed Treasury securities, constant maturity, from 2006 to 2015.

The bottom line is that the U.S. CPI increased in February (by 0.2 percent). It was the first increase in four months, due to stable oil prices in February. It could be interpreted as negative news for the gold prices, however inflation in positive territory does not necessarily brings us closer to the Fed’s hike. This is because in March we witnessed further declines in the oil prices and a surge in the U.S. dollar, which will again exert downward pressure on inflation and could postpone or softer the Fed’s tightening, to the satisfaction of the gold bulls.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Gold News Monitor
Gold Trading Alerts
Gold Market Overview