CPI reveals consumer prices recorded the lowest yearly increase since 2020

At 8:30 EDT the Labor Department released the latest inflationary report, the Consumer Price Index (CPI) for June. The report revealed that inflation has declined to its lowest monthly increase since August 2021. The Consumer Price Index gained 0.2% last month double the increase of 0.1% in May. The vast majority of increases in consumer pricing was in the category of shelter which made up 70% of last month’s rise in the CPI. Increases were also evident in automobile insurance, and fuel which rose 1.0 %. However, there was a significant decrease in the cost of used trucks and cars.

According to the  News Release by the Bureau of Labor Statistics, “The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.2 percent in June on a seasonally adjusted basis, after increasing 0.1 percent in May. Over the last 12 months, the all items index increased 3.0 percent before seasonal adjustment.”

The rate of core inflation slowed from 5.3% in May to 4.8% last month. The importance of this decline is that the Federal Reserve believes that the core rate is the best predictor of inflationary trends. However, core inflation at 4.8% is still more than double the Fed’s target of 2% so even with last month’s decline the report indicates that both headline and core inflation continues to be troublesome as each month brings higher pricing for consumers across-the-board.

This means that there continues to be an exceedingly high probability of an interest rate hike of ¼% by the Federal Reserve at the next FOMC meeting at the end of this month. According to the CME’s FedWatch tool, the probability of ¼% rate hike implemented on July 26 is 92.4%, down fractionally from yesterday’s forecast of 93%, and 90.5% one week ago. There is however only a 12.9% probability that the Fed will implement back-to-back rate hikes in both the July and September FOMC meeting.

The key takeaway from today’s report is that inflation is declining considering that it is roughly half of last year’s inflation rate of 9.1%. However, inflation is still running at a level that is unlikely to soften the resolve of the Federal Reserve from raising rates two times this year.

On the surface, gold futures had a significant gain today. The most active August futures contract is currently fixed at $1963.10 after factoring in today’s gain of $26 or 1.34%. But as we have seen throughout this last couple of weeks gains in gold have much more to do with dollar weakness than traders actively bidding the precious yellow metal higher.

The dollar had one of its deepest one-day declines since January 2023. The dollar opened at 101.295 which was also the highest value of the day and traded to a low of 100.18. Currently, the index is down 1.14% and fixed at 100.25. Considering that gold futures gained 1.34% in the dollar index declined by 1.14% only 0.2% of today’s gains in gold can be attributed to traders bidding gold prices higher.

The dollar index opened at 103 on July 6 and has lost 2.75% in the last five trading days. Gold gained approximately 2.13% during the same period clearly illustrating that recent gains in gold over the last five trading days are the result of dollar weakness rather than bullish market sentiment persuading traders to bid gold prices higher.

Yesterday we said that if today’s report shows a significant decline in inflation, it could easily trade to the first resistance level at $1955. Gold not only traded to but closed above that key level which moves the current resistance level to $1971 which corresponds to gold’s 50-day moving average and major resistance at $1980 which corresponds to a 38.2% Fibonacci retracement. Gold could continue to trade higher throughout the week testing either $1971 or $1980. But it must be noted that it seems likely that further gains in gold will be based on dollar weakness rather than bullish market sentiment for gold.

Wishing you as always good trading,