Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Inflation Accelerates In June. Will Gold Finally React?

By Sunshine Profits (Arkadiusz Sieron)CommoditiesAug 20, 2021 04:35PM ET
www.investing.com/analysis/inflation-accelerates-in-june-will-gold-finally-react-200599532
Inflation Accelerates In June. Will Gold Finally React?
By Sunshine Profits (Arkadiusz Sieron)   |  Aug 20, 2021 04:35PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
XAU/USD
-0.11%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
Gold
+0.28%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

Inflation surged in June to 5.4%. It may retrace soon, but there’s a good chance that it will increase again later, boosting gold at last.

The inflation monster has reared its ugly head. The CPI annual rate surged to 5.4% in June, accelerating from already mind-blowing 5% in May. It was the hottest pace since the Great Recession. However, Fed Chair Jerome Powell and his colleagues from the FOMC still claim that inflation will only be temporary, as it was boosted by the reopening from the Great Lockdown, while others predict a replay of the stagflation from the 1970s. Who is right?

Well, it’s true that some inflation measures will decline in the near future. After all, the economy faces supply chain bottlenecks, which are causing price spikes. The global shortage in the supply of semiconductor chips is one of the temporary problems that led to the annual 45.2% spike in the price of used cars in June, accounting for more than one-third of the surge in the overall index.

However, used vehicle prices are skyrocketing not just because of the problems on the supply side, but also because of a higher-than-expected demand. And where did this strong demand come from? You got it – from the extra cash that has been created and distributed to people. There is so much liquidity in the markets thanks to very easy fiscal and monetary policies that people just want to buy stuff, no matter the price.

As Milton Friedman notes, “inflation is always and everywhere a monetary phenomenon” – prices cannot keep on rising without the expansion of money supply. So, supply bottlenecks are only one driver of rising inflation – the surge in the broad money supply, the reduced pace of globalization and the complacent stance of central banks are other factors.

What’s more, even if we drop the subindex for used cars from the calculation, the annual inflation rate would be 3.6%, almost twice the Fed’s target. Indeed, there is still some base effect, but even if we compare the recent inflation readings to February 2020, we see in the chart below that the CPI is 4.7% higher than before the pandemic.

So, some improvement in the supply of semiconductors (if we drop out low CPI readings from the calculation) could soften inflation somewhat in July or later this year. However, even if inflation backs out of its current pace, it will likely remain elevated; even experts admit it. The economists polled by the Wall Street Journal forecast that inflation will drop to 3.2% by the end of this year and stay above 2% through 2023.

There is still high inflationary pressure that should keep consumer prices boosted. For instance, the ISM® Prices Index registered 92.1%in June, indicating that raw materials’ prices increased for the 13th consecutive month. The index has risen to its highest level since July 1979. Producer prices are also rising, while transportation costs, in particular freight prices, are skyrocketing. All this should add to the inflationary pressure, possibly translating into higher consumer prices in the future.

Another important issue is that inflation often comes in waves. So, even if the first bout ends soon, it won’t mean that the threat of high inflation is going to disappear. It might be the case that we are just in a transitional phase, slowly moving into a period of higher inflation. Please take a look at the chart below. As you can see, the stagflation from the 1970s didn’t show up overnight.

Instead, the first wave started in 1965 and peaked a year later. However, in 1967, the second wave began, which peaked in 1970. Then, inflation eased, giving false hopes, but it accelerated again in 1973-1975, and – after another temporary retreat – in 1978-1980.

So, the first bout of inflation always looks temporary, but it may lay the groundwork for even higher inflation, especially if inflation expectations de-anchor. And, indeed, although medium-term consumer expectations remain stable, one-year expectations have recently risen, as the chart below shows. In the case of New York Fed’s Survey of Consumer Expectations (red line), they have soared 0.8 percentage points, reaching 4.8% – a new series high.

What does it all imply for the gold market?

Well, initially, the impact of inflation might be negative. This is because the markets will eventually react to higher inflation and the more hawkish Fed. So, the bond yields will rise, increasing the opportunity costs of holding gold.

However, after some time, higher inflation will become disruptive for the economy. Either real household incomes or corporate profits will decline (depending on the companies’ ability to pass surging costs), while higher interest rates will trigger some defaults. When inflationary psychology sets in and people start to worry about all the bad consequences of inflation, gold should shine. So far, the party goes on; but a hangover lurks just around the corner.

Inflation Accelerates In June. Will Gold Finally React?
 

Related Articles

Gary Tanashian
Gold And Silver: The Big Picture By Gary Tanashian - Oct 03, 2022 2

Gold and silver continue in the cyclical bear pattern that started in mid-2020. I had originally (and incorrectly) projected a cup-and-handle for gold that had to be revised to a...

Phil Flynn
The Energy Report: Making Its Move By Phil Flynn - Oct 03, 2022 2

Oil prices are soaring after Friday’s dismal performance after it became apparent that OPEC plus Russia it’s getting ready to make its move. It really shouldn’t be a surprise to...

Inflation Accelerates In June. Will Gold Finally React?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Abbas Khan
Abbas Khan Aug 22, 2021 9:12AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
arkadiusz sir next week what you expected about gold
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email