CPI Report Results in Extreme Dollar Strength, Taking Gold Prices Moderately Lower

Latest CPI Report Suggests Rising Inflation and Possible Rate Hike

The U.S. Bureau of Labor Statistics released the latest information on the current inflationary pressures today. “The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in September on a seasonally adjusted basis, after increasing 0.6 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 3.7 percent before seasonal adjustment.”

The Consumer Price Index report showed that headline inflation rose at a higher pace last month than a consensus forecast indicated. The consensus forecast had expectations for the CPI to come in at 3.6% just under the 3.7% reported by the Bureau of Labor Statistics. The forecast for core inflation was spot on anticipating that the core inflation which excludes food and energy was up by 4.1% year-over-year.

According to the report, the cost of shelter was the largest contributor to the monthly all items increase accounting “for over half of the increase”. The report added that “An increase in the gasoline index was also a major contributor to the all-items monthly rise. While the major energy component indexes were mixed in September, the energy index rose 1.5 percent over the month. The food index increased 0.2 percent in September, as it did in the previous two months. The index for food at home increased 0.1 percent over the month while the index for food away from home rose 0.4 percent.”

Today’s report increased the probability that the Federal Reserve will raise rates at the December FOMC meeting. According to the CME’s FedWatch tool, there is a 31.4% probability that the Fed will raise their benchmark interest rate by ¼%, and a 3% probability that they will raise rates by a ½% at the last FOMC meeting of the year. While the probability of a rate hike in November rose from 9.1% yesterday to 11.8% today.

Impact on the Markets

The report had a strong effect on the dollar and treasury yields taking both higher. The dollar gained 0.76% taking the dollar index to 106.365. It was dollar strength that was completely responsible for today’s decline in both spot gold and futures.

As of 4:25 PM EDT gold futures basis the most active December contract is down $5.60 or 0.31% and currently fixed at $1881.50. The decline today of 0.31% is less than half of the percentage gain of 0.76% in the dollar index.

According to the Kitco Gold Index spot gold declined by $5.70 and is currently fixed at $1868.30. Dollar strength was responsible for spot gold losing $15.00 and market participants were responsible for a $9.30 gain resulting in physical gold closing down by $5.70.

Gold as Safe-Haven

The current high geopolitical tensions with the escalating war between Israel and the militant Islamic group Hamas as well as Russia’s invasion and war with Ukraine were highly supportive of the safe-haven function that is intrinsic to gold. Gold continues to be a safe-haven asset during times of political and financial uncertainty.

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Wishing you as always good trading,

Gary S. Wagner