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Is an Uptick in Inflation on the Way, Supporting Gold?

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Apr. 3 2018, Updated 12:22 p.m. ET

Inflation softens

The most recent data for the US Consumer Price Index (or CPI) was weaker than expected. The CPI rose 0.2% in February 2018, compared to a 0.5% rise in January 2018.

The year-over-year (or YoY) rise in inflation came in at 1.8% for February 2018. The softer inflation figure in February is in line with the weaker-than-expected growth in wages during the month.

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An uptick on the way?

While the recent data might have underwhelmed the markets, there are many reasons it could surprise to the upside going forward in 2018. According to the survey of consumer expectations, one-year forward median inflation expectations rose to ~2.8% from ~2.7% in January 2018. This is the highest reading since February 2017.

The Federal Reserves considers this data among others as it decides on a rate hike trajectory. The three-year measure also jumped to ~2.9% in February from ~2.8% in the previous month. This is significant as these jumps generally come after years, but the gauges have generally slipped since 2013. The University of Michigan Index of Consumer Sentiment also corroborates consumers’ rising inflation expectations.

The forward inflation expectations in the US are firming up. As we discussed previously in this series, these expectations are in line with Goldman Sachs’s (GS) view of an expected “uptick in inflation.”

Inflation expectations and gold

In the short term, softer inflation led risk assets to rally. However, going forward, inflation is expected to move significantly higher by the Fed’s own guidance. The Trump administration’s protectionism measures are expected to add fuel to the fire. Expectations of rising inflation (TIP), on the other hand, are conducive to gold’s inflation-hedge appeal.

The mining stocks that have followed gold in their price movements include Alacer Gold (ASR), IAMGOLD (IAG), Buenaventura (BVN), and Gold Fields (GFI), which are trading at $1.90, $5.40, $14.90, and $4.30, respectively. Like precious metals, precious metal miners may rise due to a potential rise in inflation.

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