Inflation in the United States has risen by 1.2% in the last month to 3.1% overall; the highest recorded levels measured by the core personal consumption expenditures (PCE) index since the early 1990s.
Using the PCE index, Bureau of Economic Analysis reported inflation at 1.9% at the end of March, and today has reported a marginally stronger increase than the predicted 2.9% inflation.
Another popular measure, the consumer price index, jumped up to 4.2% in April in year-on-year comparison. This statistic has been heavily used in the media – and by ourselves - but has been downplayed by the Federal Reserve as both transitory and inevitable given how early into the pandemic April 2020 was.
Despite not being the official tool to measure inflation, many businesses and investors have pointed to the CPI as a clear indicator that the Fed needs to act and raise interest rates, especially when considering that energy prices are up 24.8% year-on-year and food prices are up between 0.9 and 1%.
A buzzword often thrown around, stagflation is a convergence point between high(er) unemployment, slow economic growth, and rising prices aka inflation.
Stagflation matters because US consumer confidence is down, and most economies in the modern age are heavily consumerist. The University of Michigan recently reported that its index of consumer sentiment is down at 82.9 points; a sharp drop in May from the 88.3 points in April.
The Federal Reserve needs people to keep spending, but chairman Jerome Powell has said repeatedly the Fed won't be reactionary, and these stats might be a blip anyway. March saw many Americans receive their stimulus cheques, so there's an expectation of increased spending for the remainder of March and into April.
As we reported earlier, President Biden is expected to announce his budget plans for 2022 soon, with a $6 trillion stimulus package in the works. Many investors are concerned about the economy overheating as a result. Typically the definition of 'overheating' refers to an economy that has rising inflation and a very low unemployment rate, but demand outweighing production capacity is another major factor. The US does not have low unemployment yet, but it does have demonstrably rising inflation and consumer demand globally is outstripping production capacity. With more money printed and pumped into the economy, inflation is inevitable – and so is increased demand.
Despite the talk of raising interest rates, gold has still made gains today – up $5.18 per ounce (0.27%). As the above tweet shows, gold's demand as an inflation hedge and a safe-haven asset has picked up pace in the recent weeks and months as talk of inflation grows.
Ultimately, the longer the Federal Reserve doesn't act to tackle inflation, the better for the price of gold as demand should continue to rise. While we are above the 2% inflation target, this is still 'transitory' inflation so says the Fed. It's a brief anomaly. It's fair to say gold will probably get another month at least to push on and target the $2,000 milestone, and if this time next month the Federal Reserve announce more of the same... gold could push on towards the all-time record high.