Gold Price Could React to New Inflation DataPaul-Martin Foss
With new inflation data coming out this week, the gold price could see a bullish rise if inflation picks up. While official inflation rates always underestimate the actual price increases that most people see, indications of rising inflation could send more investors piling into gold.
CPI data from March indicated an 0.4% increase, double the increase that was seen in February. That’s an annualized increase of close to 5%. Year-on-year inflation increased 1.9%, an increase from the 1.5% seen in February. If those numbers continue to increase then it’s a sign that the Fed’s monetary inflation is finally showing up in consumer price figures.
The Fed has long targeted an inflation rate of around 2% per year, or in other words, a 50% price increase over a 20-year period. Anything lower than that is seen as a sign of a weak economy, while anything higher than that is seen as evidence of an overheated economy. Many policymakers have even said they would like to see inflation run above 2% annually for some time.
If inflation comes in at under 2% year-on-year, or even comes in closer to 1%, it might put more pressure on the Fed to cut interest rates, which would be seen as bearish for gold. Cutting interest rates would result in more money being created to push into the financial system, which would keep the current stock market bull market going for just a little bit longer.
But if inflation comes in at or over 2% then the Fed will likely continue to sit on its hands and watch and wait for future data. Stock markets wouldn’t like that, as they’re hoping for more easy money to continue boosting stock prices.
On the other hand, weakening inflation could also be seen as a sign that the Fed has lost control and can no longer affect prices within the economy through its monetary policy. In that case, expect gold to rise too.
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We’re facing an unknown future and investors have a lot of questions about which way markets will move and how the Fed will react. But it’s important to remember that no matter which way gold moves in the short run, in the long run investors will be better off investing in gold to hedge against the near certainty of a coming stock market crash.