Inflation Undershoots the Fed’s Target: The Impact on Gold
Inflation and the Fed
The key variables that the Federal Reserve looks at while deciding on monetary policy decisions are inflation and employment rates. For some time, the Fed has stated that the weaker inflation data is transitory.
The PCE (personal consumption expenditure) is the Fed’s preferred gauge of inflation. While the Fed’s target for core PCE inflation is 2.0%, it has been holding below that level for more than five years.
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The latest US PCE inflation measure rose just 0.1% in October, slower than the 0.4% rise recorded in September. The 12-month measure retreated to 1.6%.
Core inflation, which excludes the impact of volatile food and energy costs, was steady at 1.4% annually. PCE inflation has not surpassed the 2.0% Federal Reserve target in more than five years.
There was a 0.1% upward revision to September’s monthly and annual core inflation figure. Market participants are citing this as evidence that inflation is firming up. Several Fed officials, on the other hand, have shown discomfort with weak inflation figures for the last few months.
The Fed’s objective and gold
Janet Yellen, the chair of the Federal Reserve, expects inflation to move higher in 2018. Some economists believe that a broader pickup in inflation in the US might require more time. The Fed will be closely watching the inflation data to determine its rate hikes in 2018 while the December 2017 rate hike seems to be a given.
Higher interest rates are usually negative for the gold outlook. Gold prices (GLD) affect key gold stocks (GDX) (GDXJ) like Gold Fields (GFI), IamGold (IAG), Kinross Gold (KGC), and Agnico Eagle Mines (AEM). While company-specific factors led to year-to-date gains for IAG, GFI, and KGC, AEM has seen losses amounting to 3.8% year-to-date.