The gold market is hanging around not far from where it began the trading week. Prices are higher by nearly $10 per ounce in early afternoon action Friday. The yellow metal has paid close attention to the week’s inflation data as well as other economic reports. With some data points showing inflation may now be easing, gold may see more buyers enter the market.

Inflation Data

This past week featured the latest readings on the Consumer Price Index (CPI), Producer Price Index (PPI), and more. Both of these key data pieces were lower than expected and may be indicative of inflation having already peaked.

The Consumer Price Index registered a reading of 8.5% year-over-year. Estimates were looking for an annual rise of 8.7%. The core reading, which strips out volatile food and energy prices, rose by 5.9% on an annual basis and by .3% monthly. The estimates had called for an annual rise of core inflation to be 6.1% and a rise of .5% on a monthly basis.

                                                                                                                                                Source: en.wikipedia.org

The large drop in consumer prices from the June reading of 9.1% was likely due to the sharp drop in gasoline prices. The decline in energy and gasoline prices more than offset the rise in both food and shelter costs.

The Producer Price Index also came in below expectations. The PPI figures registered a reading of 9.8% year-over-year. July showed a decline of .5%, however, in another sign that price pressures may be easing. The monthly decline was the first since April 2020 and the annual increase was the lowest since October 2021.

Fed May Have To Reconsider

The less-than-expected inflationary pressures could give the Federal Reserve something to think about. The Fed will not be meeting regarding interest rates until next month, and that leaves several weeks of data the Fed could still scrutinize before making any decisions.

Despite this week’s weaker inflation figures, investors need to be careful before going overboard on any possible adjustments the Fed could make. Just because the headline inflation number was lower does not mean that core inflation is any lower. Price pressures remain a very large problem in the U.S. and globally and may remain as such for several months to come or longer.

Investors will also pay close attention to the data stream over the weeks ahead, looking for any possible clues about what the Fed may or may not do come September. If the data stream continues to show inflation easing, markets may get increasingly bought. If the data shows inflation remaining robust, however, stocks and risk assets may have a tougher road ahead.

Bulls Absorbing The Selling

The gold market may find itself trying to figure out the Fed as well. The bulls have done a good job, thus far, of absorbing the selling pressure seen in recent months. The bulls have rapidly taken the metal from less than $1700 back to $1800 in a matter of days. Despite any short-term obstacles, the long-term narrative for gold remains quite bullish.

The long-term bullish narrative for gold could keep it from seeing further declines. While inflation remains a global problem, there may only be two ways the Fed can deal with it: Hike rates to the 20% area which seems extremely unlikely. The Fed could also abandon its inflation fight and let it run its course.

Fed May Be Out Of Choices

Allowing inflation to run high may be the only real choice the Fed has. By not raising rates further to fight it, the Fed could also lay the groundwork for equity markets and risk assets to potentially recover. Some analysts have suggested that Fed Chairman Jerome Powell’s remarks after the latest FOMC meeting were designed to give markets the impression the Fed could start to pivot away from the inflation battle.

The Fed is walking a very dangerous tightrope whatever it decides to do, however. Giving up the inflation battle now could lead to an extended period of stagflation in which prices remain high as employment and economic activity decline.

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