Inflation Monster Rears Its Ugly Head - Will Gold Beat It?

Inflation surged 4.2% in April, but gold declined in response. What is happening? The “non-existent” inflation keeps getting stronger. The CPI increased 0.8% in April after rising 0.6% in March. The pundits cannot blame energy prices for this jump, as the energy index decreased slightly.

This shows that the surge in inflation wasn’t caused just by the base effect. Apart from energy, all major component indexes increased last month. In particular, the index for used cars and trucks rose 10.0%, which was the largest monthly increase since the series began in 1953.

As a result, the core CPI, which excludes food and energy, soared even stronger in April, i.e., 0.9%, following a 0.3% jump in March. It was the largest monthly increase since April 1982. And now for the best part of the recent BLS report on inflation: As the chart below shows, the overall CPI surged 4.2% over the 12 months ending in April, while the core CPI jumped 3.0%. These annual rates followed the respective 2.6% and 1.6% increases in March.

So, there was a huge acceleration in inflation last month. The last occurrence of such high inflation was in 2008 during the Great Recession. The quickening was a surprise for many analysts, but not for me. When analyzing the March CPI report, I wrote that it wasn’t an outlier:

"What’s important is that the recent jump in inflation is not a one-off event. We can expect that high inflation will stay with us for some time, or it can accelerate further next month."

And indeed, inflation escalated in April. In May, however, inflation could be softer, but it will remain relatively elevated, at least in my view.

Implications for Gold

What does the hastening in inflation imply for the precious metals market? Well, the London P.M. Gold Fix has barely moved, as the chart below shows. What’s more, the New York spot gold prices have decreased in the aftermath of the April report on the CPI.

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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 ...

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