US Core Inflation in July Sees Largest Increase since 2008

US core CPI rises the most in almost ten years

The US consumer price index (or CPI) for July rose 0.2% sequentially and 2.9% over the last 12 months. The annual rise was the same in June. The core CPI, which excludes the volatile food and energy components, rose by 2.4% in the 12 months to July, which was the largest increase in core CPI since September 2008. In June, core CPI rose by 2.3%. Most of July’s gains in price index were due to higher housing costs. The prices for energy (USO) and medical care slipped in July, while food expenses slightly rose.

US Core Inflation in July Sees Largest Increase since 2008

Markets focus on inflation figures

Markets have paid close attention to inflation in 2018, as it is one of the most important deciding factors in the Federal Reserve’s decisions regarding interest rates. Investors might recall that after January average hourly earnings rose the most since the recession (they were later revised downward), the US stock markets fell due to expectations of more aggressive rate hikes by the Fed. The S&P 500 (SPY) fell 6.2% in the two days following the jobs report, while the Dow Jones Industrial Average Index (DIA) and the NASDAQ Composite (QQQ) fell 7.1% and 5.9%, respectively.

Inflation, interest rates, and gold

The Fed has raised rates twice this year, and the market is expecting two more hikes in the rest of the year. The Fed’s preferred gauge of inflation is the core personal consumption expenditure (or PCI) Index, which increased by 1.9% in June.

The latest inflation figures should keep the Federal Reserve steady on its path for gradual interest rate hikes. The impact of inflation on gold can be twofold. One on hand, higher inflation is positive for gold as investors rush to gold (IAU) as an inflation hedge. On the other hand, if inflation continues to overshoot expectations, the Fed might have to raise rates more aggressively to keep the economy from overheating, which would be detrimental to gold’s (GLD) investment appeal.