Gold prices holding support above $1,800 an ounce following sharp 0.9% rise in U.S. Inflation

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(Kitco News) – The gold market is holding gains and support above $1,800 an ounce  as U.S. inflation pressures see a significant rise in June.

Tuesday, the U.S. Labor Department said its U.S. Consumer Price Index rose 0.9% in June, after a 0.6% rise in May. The data significantly beat consensus forecasts as economists were forecasting a 0.5% rise.

“This was the largest 1-month change since June 2008 when the index rose 1.0 percent,” the report said

For the year, the report said that headline inflation rose 5.4%.

Meanwhile, core CPI, which strips out food and energy costs, increased 0.9% in June, up from a 0.7% increase in May. Economists were expecting to see an increase of 0.4%.

Core inflation continues to see unprecedented growth. The report said that annual inflation rose 4.5%, the largest 12-month increase since the period ending November 1991.

The hotter-than-expected inflation data is proving some support for gold prices. August gold futures last traded at $1,810.60 an ounce, up 0.27% on the day.

Market analysts note that rising price pressures should continue to support gold prices as the inflation threat pushes real yields lower. Last week real yields fell below -1% for the first time since February.

However, some analysts note that gold could also struggle in the short-term as rising inflation could force the Federal Reserve to tighten interest rates soon than expected. At the June Federal Reserve monetary policy meeting, the central bank signaled in its updated projects that it could raise interest rates in 2023.

Some economists expect that the U.S. central bank will announce a reduction in its monthly bond-purchase program as early as August.

Katherine Judge, senior economist at CIB said that, her firm sees the potential for higher interest rates as early as the second half of 2022.

“Another upside surprise in inflation suggests more widespread impacts of supply chain issues, and raises further questions about how quickly these factors will fade amidst strong demand,” she said. “Ultimately, with economic slack expected to be eliminated later this year, price pressures should be firm enough through 2022 to see the Fed hike rates in the second half of that year.

However, many economists still expect that the rising inflation threat will be temporary. Looking at the latest CPI data, the price of used cars increased 10.5% for the year, represented about one-third of the increase annual increase in CPI.

Looking at other components of the report, the food index increased 0.8% in June, a larger increase than the 0.4% increase reported for May. Meanwhile, the energy index increased 1.5% in June, with the gasoline index rising 2.5% over the month.

Andrew Hunter, senior U.S. economist at Capital Economics said that the rise in inflation appears to be more permanent than expected.

“While the upward pressure on prices from goods shortages and reopening should eventually fade, we expect a sustained acceleration in wage growth to result in only a marginally drop back in core inflation. From an average of just over 3% this year, we expect core CPI inflation to be 2.8% next year, much higher than Fed officials appear to be anticipating,” he said.

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