Annual core CPI jumped 2.4 percent, the fastest pace since September 2008. Is it the peak – or just the beginning of inflation? And what does it mean for the gold market?

What Happened?

On Friday, the BLS released its latest report on inflation. It showed that the Consumer Price Index increased 0.2 percent in July, following a 0.1 percent uptick in June. The core index, which excludes food and energy, rose 0.2 percent for the third month in a row. Over the last 12 months, the CPI rose 2.9 percent, the same as in the previous month. But the core CPI accelerated and jumped 2.4 percent. This was the largest annual increase since September 2008, as one can see in the chart below.

Chart 1: U.S. CPI (green line, annual % change) and core CPI (red line, annual % change) from July 2008 to July 2018.

This indicates that inflationary pressures strengthened in July. Interestingly, monthly inflation remained unchanged despite that 0.5 percent fall in energy prices. The 0.3 percent rise in the shelter index, which is a dominant component of the CPI, offset the decline in the energy index. This is also why the core index accelerated.

Although some people see rising inflation as a sign of a healthy economy, it is worth noting that it undermines the consumers’ purchasing power. Indeed, real wages have stagnated recently.

Have We Seen the Peak?

After the core CPI accelerated to the fastest pace of growth since September 2008, some experts started to worry about rising prices, while other claimed that it was likely that we had just seen the peak in inflation. Who is right?

Well, take a look at producer prices. On an annual basis, the PPI jumped 3.3 percent in July, the highest level since 2011. Importantly, the tariffs on Chinese goods should support the price pressure in the coming months. Hence, a further increase in inflation wouldn’t surprise us, but it should be temporary and moderate, unless we see a full-blown trade war. If we avoid such a conflict, trade patterns should adjust to the new reality and then new capacity would spring up in new places, keeping prices under control.