Inflation Will Settle Gold's Future--Better Watch It Closely

By Arkadiusz Sieron, ValueWalk

Inflation continues to rise but may soon reach its peak. After that, its fate will be sealed: a gradual decline. Does the same await gold? If you like inviting people over, you’ve probably figured out that some guests just don’t want to leave, even when you’re showing subtle signs of fatigue. They don’t seem to care and keep telling you the same not-so-funny jokes. Even in the hall, they talk lively and tell stories for long minutes because they remembered something very important. Inflation is like that kind of guest – still sitting in your living room, even after you turned off the music and went to wash the dishes, yawning loudly.

Indeed, high inflation simply does not want to leave. Actually, it’s gaining momentum. As the chart below shows, core inflation, which excludes food and energy, rose 6.0% over the past 12 months, speeding up from 5.5% in the previous month. Meanwhile, the overall consumer price index (CPI) annual rate accelerated from 7.1% in December to 7.5% in January.

It’s been the largest 12-month increase since the period ending February 1982. However, at the time, Paul Volcker raised interest rates to double digits and inflation was easing. Today, inflation continues to rise, but the Fed is only starting its tightening cycle. The Fed’s strategy to deal with inflation is presented in the meme below.

What is important here is that the recent surge in inflation is broad-based, with virtually all index components showing increases over the past 12 months. The share of items with price rises of over 2% increased from less than 60% before the pandemic to just under 90% in January 2022.

As the chart below shows, the index for shelter is constantly rising and – given the recent spike in “asking rents” – is likely to continue its upward move for some time, adding to the overall CPI. What’s more, the Producer Price Index (PPI) is still red-hot, which suggests that more inflation is in the pipeline, as companies will likely pass on the increased costs to consumers.

So, will inflation peak anytime soon or will it become embedded? There are voices that – given the huge monetary expansion conducted in response to the epidemic – claim high inflation will be with us for the next two or three years, especially when inflationary expectations have risen noticeably. I totally agree that high inflation won’t go away this year.

Please just take a look at the chart below, which shows that the pandemic brought huge jumps in the ratio of broad money to GDP. This ratio has increased by 23%, from Q1 2020 to Q4 2021, while the CPI has risen only 7.7% in the same period. It suggests that the CPI has room for a further increase.

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