The Bureau of Economic Analysis (BEA) released the latest data on current inflationary levels versus the PCE (personal consumption expenditure price index) on Friday. Inflation rose by 0.6% in January, the largest yearly increase since 1982, the report said. January's 0.6% rise is an increase of 6.1% year-on-year. The latest report on the CPI, including energy and food, revealed a 7.5% spike in inflation, the highest level since 1982. To understand how there has been continuing growth in inflation, the September PCE index should be taken into account. On a yearly basis, the figure came at 4.4% in September, 5.1% in October, 5.6% in November, and 5.8% in December. Since September 2021, inflation as represented by the Federal Reserve's preferred PCE index has risen by 1.7%. No doubt, inflation is weighing on the market, affecting gold prices. Gold has been long considered a safe haven used as a hedge against rising inflation by investors.
At the same time, as inflation rises it puts more pressure on the US Federal Reserve to raise interest rates. Meanwhile, monetary policy tightening is likely to have a negative or bearish impact on gold. Some Fed members have confirmed that they plan to raise rates by 0.25% and initiate immediate rate hikes - the beginning of interest rate normalization - raising rates for the first time since the outbreak of the pandemic in March 2020. Inflationary pressure continues to build up in the wake of Russian aggression. The country produces about 10% of global crude oil. Oil prices have already soared to above $100 per barrel.
Food prices are expected to increase, which may boost inflation. Investors are weighing in on what effect the full-scale invasion by Russia into Ukraine will have on financial markets. Before the invasion, stocks worldwide dropped sharply as it had been expected that such a move would have a dramatic impact resulting in an economic contraction. However, US stocks have somewhat recovered over the last two days. The European Union together with the United States and Canada began to announce sanctions against Russia for the premeditated attack and invasion of Ukraine. However, President Biden has acknowledged that the sanctions will not have an immediate impact and it could take months before they affect the Russian economy. What is clear is that the likelihood of a diplomatic solution or an end to the current military actions will not unfold quickly. The Russia-Ukraine war could result in major destruction, hardship, and death of the Ukrainian people. Over the last two days, we have seen gold fluctuating sharply. The pullback from Thursday's highs is seen by analysts as technical profit-taking. The recent drop in prices indicates a further decline in gold prices is hasty. According to Commerzbank analyst Daniel Briesemann, there is a risk of further escalation in the conflict and it could be just a temporary correction.
