Weekly reviews

Is inflation up?


The US Federal Reserve announced at past meetings that moderate inflation is caused by temporary factors. Can rising inflation push gold prices up?

At a press conference in May, Jerome Powell said that the recent slowdown in inflation was temporary. This is confirmed by CPI data, which rose by 0.4 percent in March and then, by 0.3 percent in April. It is very important to pay attention to the fact that the basic CPI, which does not include the prices of food and energy, has been growing for three months in a row by 0.1 percent per month. Thus, we can state a steady increase in US inflation this spring.

On the other hand, inflation remains close to the Fed target of 2%. This means that despite the growth, this inflation rate is not sufficient for the Fed to consider changing in monetary policy. In addition, the country has extremely low unemployment rate and a healthy labor market. Therefore, the US Federal Reserve for sure will patiently wait and not rush to raise interest rates.

However, if such inflation growth continues to gain momentum and the target threshold is exceeded, we should be ready with a high probability, for one more Fed rate hike at the end of 2019.

Another factor capable of stimulating inflation is the new duties on Chinese goods. The increase in duties from 10 to 25 percent on imports in the amount of $ 200 billion is able to disperse inflation, because at the end of the day, all tariffs will be included in prices for every consumer within the United States. Consequently, the CPI is likely to increase by the end of 2019. Consequently, the analytical department of FortFS assumes that the probability of an increase of the interest rates remains quite high, and the risks of such an increase are shifted to the last quarter of 2019.

Does rising inflation mean rising gold popularity?

Traditionally, it is considered that gold becomes popular and grows in price during periods of high inflation. Yes, this is true and gold is truly an excellent protective asset against many economic problems. However, in the modern realities of the US Federal Reserve's policy, this correlation is rather negative than positive. In other words, with inflation rising, the Fed is inclined to raise interest rates as well, thereby increasing the cost of loans and, accordingly, increasing the value of the USD relative to assets that do not generate interest income. The choice of investors in this case is obvious and not in favor of gold. Due to this fact, the increase in the value of USD negatively affects the value of the yellow metal. Of course, all of the above does not apply to cases of explosive uncontrolled inflationary growth or the so-called hyperinflation. In fact, until inflation can be controlled by the Fed through a mechanism of manipulating with bank discount rates, gold will not show aggressive growth. But during periods when the regulator loses control of inflation, gold breaks out in undisputed leaders among most investment opportunities.