Higher US Inflation Could Clip Gold's Wings

Inflation in the US is expected to rise due to the impact of tariffs, but a resilient economy could surprise the market again, with the future of gold prices in the balance.

When Will Inflation Rise?

Economists expect Wednesday's CPI report will show that as a result of higher import duties, as forecast by the Fed. In fact, this remains the main argument used by the Fed to justify keeping rates unchanged. The fact that the tariffs are causing a cost is evident in the from import levies. However, whether that actually reaches the consumer in the form of higher prices to an extent that would affect the inflation rate enough to change policy is another matter.

Economists have also argued that the economy would be impacted by tariffs, which is evident in the Q1 GDP turning negative, but that was before the major tariffs were imposed in April. Last week, it was reported that at 139K, although this was below the 159K average for the last twelve months. The unemployment rate stayed steady at 4.2% while wages grew faster than expected, a sign of a tight labour market. All of this is making the case for the Fed to keep rates unchanged, as the economy is solid and inflation is still slightly above target.

The Detail in the Data

US President Donald Trump has repeatedly called for lower interest rates to help the economy. However, the latest estimate from the Fed's GDPNow tracker projects, contradicting the President's apparent pessimism about the economy. This growth not only provides room for the Fed to keep rates higher, but it could even be fast enough that from taking off again. The odds of a rate cut in September dwindled to just over 60% following the latest jobs numbers.

Economists expect a reversal of the trend, with the US May CPI projected to rise to 2.5% on an annual basis from 2.3% in April and the core rate to tick up to 2.9% from 2.8% prior. to accelerate amid the signs of resilience in the US economy, as high rates make the yellow metal less attractive to investors. However, a significant miss in the inflation data could revive expectations of further rate easing, which could provide gold some momentum to the upside.

Gold Hangs in the Balance

Gold prices have traded relatively rangebound since April’s record high at $3500 per ounce, with lower highs and higher lows suggesting a symmetrical triangle pattern might be underway. Despite the visual appeal, with only two extra points of reference ($3120 and $3400), if the regional support at $3250 gives way to bears, the yellow metal could extend its losses to near $3200. To the upside, only reclaiming the local swing high would imply another attempt at the record peak above $3440, with an actual break past it opening the door to the measured move projection estimated around $3700 (assumes breakout near $3350).

Source: SpreadEx / Gold

Key Takeaways

The upcoming CPI report is expected to show higher inflation due to import tariffs, which the Fed has cited as justification for keeping its current stance. However, strong GDP growth and a tight labour market could prompt the Fed even to hike rates to prevent inflation from accelerating. While Trump has called for lower rates, GDP projections contradict his pessimistic view of the economy. Gold prices have struggled amid signs of economic resilience, but a significant miss in inflation could revive expectations of rate cuts.