Will Disinflation Inflate Silver Prices?

Disinflation continues, and it’s good news for silver prices. The odds of seeing a less hawkish Fed are rising!

The prices declined in December by 0.1% compared to November. The deflation followed 0.1% inflation in the preceding month. The core inflation, which excludes food and energy prices, increased 0.3% last month, following 0.2% in November.

It suggests that inflation is more entrenched in the economy, and right now, it is less about energy prices and more about shelter prices. Indeed, the gasoline index declined 9.4% in December, while the shelter index rose 0.8% over the month, being a dominant factor in the monthly increase in the core CPI.

On an annual basis, the CPI inflation rate softened from 7.1% in November to 6.5% in December. It was the smallest 12-month increase since the period ending October 2021. The core CPI inflation rate also slowed down, although to less extent: from 6% in November to 5.7% in the last month of the year.

All the figures were perfectly in line with expectations. However, the markets reacted positively anyway. This is because the recent CPI report shows huge disinflation. To be clear, inflation is still high and much above the Fed’s target, but it seems it has already peaked.

Softened Inflation Implies Less Hawkish Fed

The reason why the stock and precious metals markets reacted positively to the CPI report is simple. Weaker inflation implies that the Fed could adopt a more dovish stance. It could worry less about inflation and focus more on the potentially negative effects of its tightening cycle on the labor market and the economy.

This is at least what the markets expect. According to the CME FedWatch Tool, future traders see a 94.2% chance that the US central bank will raise interest rates by 25 basis points in early February. One week ago, the odds were just 62.6%.

Implications for Silver

What does it all mean for the silver (and gold) in 2023? Well, the release of the report sent silver prices up initially. They jumped above $24 for a while but corrected later to about $23.6 - only to rally again. Hence, they continued to be traded just below $24, as the chart below shows.

Silver Prices in 20222-2023

However, the CPI report is fundamentally positive for silver prices. It reaffirmed market expectations for a less hawkish monetary policy by the Fed. Consequently, the bond yields and the US dollar declined. This fundamental backdrop is bullish for gold and silver.

Do you think inflation has indeed peaked, or will we see a second wave of inflation?

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold, and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.