Rising Cost Pressure - What Will Mr. Powell And Mr. Gold Do?

The latest IHS Markit Flash U.S. Composite PMI signals very fast economic expansion – but also strong inflationary pressure. Good news for gold, overall.

On Friday, the recent IHS Markit Flash U.S. Composite PMI has been published. There are two pieces of news for gold - one good and one bad. Let’s start with the negative information. The report signals an unprecedentedly fast expansion in business activity in May. Indeed, the composite index surge from 63.5 in April to 68.1 this month established a new record.

More importantly, both manufacturing and services sectors’ markets have shown strong growth. The former index rose from 60.5 in April to 61.5 in May (also a new record), while the PMI for services soared from 64.7 to 70.1, marking the sharpest jump since data collection for the series began in October 2009. Such an unprecedentedly fast acceleration of growth in the PMI signals strong economic growth, which is clearly bad news for the safe-havens such as gold (however, strong economic growth is something everyone expected, so it might be already priced in as well).

The good information is, however, that at least part of this growth is inflationary, as soaring demand greatly improved the firm’s pricing power. And the input costs have surged, leading to the sharpest rise in output charges since the end of the Great Recession when the data collection started:

Increasing cost burdens continued to be keenly felt, as the rate of input price inflation soared to a new survey record high, often linked to a further marked worsening of supplier performance. Commonly noted were increases in PPE, fuel, metals, and freight costs amid significant supplier delays.

The steep rise in costs fed through to the sharpest increase in output charges since data collection began in October 2009, with record rates of inflation registered for both goods and services as soaring demand boosted firms’ pricing power.

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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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