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(Kitco News) – Cooling inflation is helping to drive gold prices sharply as markets see the Federal Reserve slowing the pace of rate hikes into 2023.
On Tuesday, the US Labor Department said the highly anticipated consumer price index rose 0.1% last month after rising 0.4% in October. The data was significantly weaker than expected; Economists expected an increase of 0.3%.
According to the report, annual inflation rose 7.1% last month. Economists expected an increase of 7.3%.
“This was the smallest increase in 12 months since the period ending December 2021,” the report said.
The gold market was above $1,800 an ounce prior to the report and has gained even more in the initial response. February gold futures last traded at $1,814.10 an ounce, up more than 1% on the day.
Excluding volatile energy and food prices, the report said core CPI rose 0.2%, compared to October’s 0.3% increase. Economists expected an increase of 0.3%.
For the year, annual core inflation rose 6.0%, the report said.
Gold is benefiting as the US dollar falls to a year-to-date low in response to inflation data. Economists note that the fall in consumer prices gives the Federal Reserve room to slow the pace of rate hikes in 2023.
The Federal Reserve is expected to raise interest rates by 50 basis points on Wednesday. Still, many analysts and economists are looking to see where the central bank sees interest rates spike in 2023.
Many analysts note that the current economic climate is favorable for gold. They said inflation, while off its peak, will remain well above pre-COVID levels for the foreseeable future as the Federal Reserve eases its aggressive rate hikes.
Looking at the components of the report, housing costs were the largest contributor to inflation last month. At the same time, food prices rose by 0.5% and energy prices fell by 1.6% as gasoline prices fell.
The energy index has increased by 13.1% over the past 12 months and the food index by 10.6% per year.
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