Inflation Advances And So Does Gold — Except When It Doesn’t

Inflation accelerated again in September, and gold prices (finally!) reacted positively. Bad news: the rally was short lived.

Unfortunately, I was right. One month ago, when commenting on the CPI readings for August , I wrote that inflation “doesn’t have to go away anytime soon” and that the economic developments suggest that “inflation isn’t disappearing just yet.” And here we are, one month later, with inflation accelerating again.

Indeed, the latest BLS report on inflation shows that the CPI rose 0.4% in September after increasing 0.3% in August. The core CPI, which excludes food and energy prices, also accelerated to 0.2% in September from 0.1% in the preceding month.

On an annual basis, inflation has also accelerated a bit, as the chart below shows. The overall index soared 5.4% in September, following 5.2% in the previous month (numbers seasonally adjusted). It was the biggest surge since July 2008 – and that was in the midst of the Great Recession . Meanwhile, the core CPI edged up from 3.98% to 4.04%.

So, inflation is not transitory. On the contrary, the chart shows that the June overall CPI reading functioned as a peak only temporarily. The fact that inflation rebounded to a new high is a final blow to the ‘transitory inflation’ narrative. Therefore, my warnings that inflation doesn’t have to go away anytime soon remain valid.

Actually, my arguments have been strengthened by the recent data. Why? Well, inflation intensified despite the fact that several subindexes declined in September. As we can read in the BLS report:

The index for airline fares continued to fall sharply, decreasing 6.4% over the month after falling 9.1% in August. The apparel index also decreased in September, declining 1.1% over the month after rising 0.4% in the previous month. The index for used cars and trucks fell 0.7% this month, continuing to decline after it decreased 1.5% in August.

So, why didn’t inflation decrease?

After all, the mainstream narrative was that inflation was caused by a few categories strongly linked to the money supply and in the monetary demand.

More specifically, the declines in some subindexes were counterweighted by increases in others, in particular by the significant acceleration in the shelter index. As one can see in the chart below, the shelter index jumped 3.2% in September, much faster than the 2.8% observed in August.

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This acceleration is perfectly in line with my analyses. In September, I wrote:

Secondly, the index for shelter – the biggest component of the CPI – has been rising gradually since February 2021, and it accelerated from 2.79% in July to 2.82% in August (…) As a reminder, home prices – which are not covered by the CPI – have been surging recently, which should translate into further increases in the index for shelter.

Oh boy, I hate to be right! However, I’m afraid that consumer inflation could increase even further in the near future. Careful examination of the money supply growth implies that the real peak in inflation might occur in Q1 2022. Given the upward trend in home prices, the shelter index could continue its upward march. Last but not least, the surging Fed’s tightening cycle , creating downward pressure on gold prices.

All in all, the September report (which showed continuously rising inflationary pressure) made investors rethink the Fed’s transitory argument. These worries pushed gold prices to their resistance level of $1,800 on Thursday, as the chart below shows.

Unfortunately for the gold bulls, any hopes of a more prolonged quantitative easing , gold will remain under downward pressure. Nonetheless, when it finally happens, better times may come for gold.

Written By: Investing.com