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US Inflation Rises: How Will It Impact Gold Prices?

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Apr. 16 2018, Updated 8:10 a.m. ET

Inflation rises

According to the US Bureau of Labor Statistics, the US consumer price index (or CPI) rose 2.4% year-over-year (or YoY) in March 2018. This is its fastest pace in the last 12 months. The core CPI, which excludes volatile food and energy components, rose 0.2% over the previous month and 2.1% YoY in March. This was the biggest gain in core prices since February 2017.

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Transient factors dissipating?

One of the factors that has significantly contributed to this increase is the impact of a change in mobile phone service costs. These costs fell sharply in March 2017 after several carriers launched unlimited data plans. Lower mobile phone service costs were likely one of the transient factors weighing down inflation. The Fed’s preferred gauge of inflation is the personal consumption expenditure (or PCE) index, which has been below the Fed’s 2% target for more than six years. The policymakers are expecting a gradual pick-up and have projected 1.9% inflation for 2018.

Inflation expectations and gold

While expectations of rising inflation (TIP) are conducive to gold’s inflation-hedge appeal, until the Fed raises rates more aggressively, gold might have some downside too. Mining stocks that have followed gold in their price movements include Alacer Gold (ASR), IAMGOLD (IAG), Buenaventura (BVN), and Gold Fields (GFI). These stocks are currently trading at $1.8, $5.2, $14.7, and $4.0, respectively. Like precious metals, precious metal miners may rise due to a probable rise in inflation.

In the next part, we’ll discuss the minutes from the Fed’s March 20–21 policy meeting and what impact it could have on gold’s outlook.

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