(Kitco News) The market is no longer convinced that inflation might be as transitory as the Federal Reserve is letting on after U.S. consumer prices jumped 6.2% on an annual basis in October – the hottest reading since 1990.
In response to the data, gold jumped nearly $40 on the day, with December Comex futures last trading at $1,867.50, up 2% on Wednesday. Stocks, on the other hand, dipped as risk-off sentiment spread.
On a monthly basis, the consumer price index (CPI) was up at 0.9%, the largest gain in four months. Also, core CPI, which strips out food and energy costs, was up 4.6% year-over-year, marking the largest increase since August 1991.
Looking more closely at the price gains, energy, shelter, and food costs were the main drivers in October. Food was up 5.3% from a year ago – the biggest increase since January 2009. Gasoline prices surged 6.1%, marking the biggest gain since March. Fuel oil saw the biggest increase since 2007, rising 12.3% from the prior month. And electricity costs were up 1.8%, the largest monthly increase in seven years.
"Below the surface, over 80% of CPI subcomponents were above 2%, the highest since 1991, which indicates broader price increases, not only related to reopening. The bond market is telling you that the Fed is way behind the curve on policy, as short rates rocketed while long rates have taken the release in stride. A flattening curve does not portend well for risk assets into next year," said Cornerstone Wealth chief investment officer Cliff Hodge.
In the latest comments from U.S. officials, Treasury Secretary Janet Yellen tried to reassure the markets on Tuesday, stating that elevated price pressures will not last. Yellen added that the Fed also stands ready to act if needed to prevent the 1970s-style inflation.
"I'd expect price increases to level off, and we'll go back to inflation that's closer to the 2% that we consider normal" as the pandemic fades, Yellen told National Public Radio's 'Marketplace' show.
Yellen noted that she doesn't see inflation persisting beyond next year as the economy and demand return to normal.
The 1970s scenario is not about to repeat, Yellen pointed out, explaining that five decades ago, "people thought that policymakers wouldn't bring it to an end, and inflation expectations became embedded in the American psyche … That isn't happening now, and the Federal Reserve wouldn't permit that to happen."
Economists, however, are now not ruling out inflation rising to 7% on an annual basis in the near term.
"U.S. inflation again exceeded expectations by a wide margin. The headline and core rates are now at 30-year highs with near-term momentum, suggesting 7% is possible. Pipeline price pressures show little sign of abating, and inflation expectations are climbing as well, leading us to conclude QE tapering will be accelerated and rate hikes will come sooner," said ING chief economist James Knightley.
The October inflation data looks like the trigger gold was waiting months for, with investors now aggressively seeking it out as an inflation hedge. On a technical basis, the precious metal has finally broken above the critical $1,830 resistance level, which could open the door to $1,900 an ounce.
"Gold prices are making a push through the multi-month downtrend formed from all-time highs amid the stronger-than-expected inflation data, which is fueling a push for inflation protection while pricing for central bank hikes remains in flux," said strategists at TD Securities. "A breakout north of the multi-month downtrend could also help the trend of ETF outflows reverse, powering gold prices even higher."
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