One of the biggest stories since the last edition of the Market Overview, is inflation reaching the Fed’s 2-percent target. As we analyzed in the Gold News Monitor, The latest report on the Personal Income and Outlays revealed that the annual rate of the PCE Price Index rose 2.3 percent, while the core inflation hit 2 percent, the Fed’s target, for the first time since April 2012.
We don’t have newer data on PCEPI, but the report on the CPI was released in the meantime. It turned out that consumer prices rose 2.9 percent in June on annual basis, a slight increase from 2.8 percent in May. It was the highest yearly rate since 2012. Meanwhile, the core CPI edged up to 2.3 percent. As one can see in the chart below, the core index hasn’t increased faster than 2.3 percent since the Great Recession.
Chart 1: U.S. annual CPI rate (blue line) and core CPI rate (red line) from June 2008 to June 2018.
What does it imply for the economy, Fed’s stance and the gold market? Well, the acceleration in inflation shows that inflationary pressure has settled for good in the US economy. As the chart above shows, inflation has been in an upward trend since 2014 (2015) when it was in the deflation zone. And the PPI also increased. The wholesale cost of goods and services rose 3.4 percent in June on annual basis, the highest rate since almost seven years. It’s really important, because the rise in the PPI should translate into higher CPI after a few months.
What next? Nobody knows for sure, but we expect that rising energy prices will support higher inflation further. As one can see in the chart below, the annual rate of energy inflation has been recently in an upward trend, hitting 12 percent in June. It shouldn’t be surprising as energy is highly dependent on the price of crude oil, which has been in a bullish mode in the last months. A tightening labor market and rising input costs, partially due to the new trade tariffs, should also help inflation to overshoot the Fed’s target.