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Higher than Expected Inflation: Gold Steady, Oil Falls

Yesterday, the US Labor Department released Consumer Price Index (CPI) data that reflected a 0.9% increase in inflation compared to the previous month. The data exceeded expectations again and returned to August 2008 figures. Also, a lot of analysts find similarities with the inflationary period of the 1970s.

The inflation figure increased 5.4% compared to June 2020, the highest 12-month rate since August 2008. The resumption of “normal” life after the pandemic, the reopening of restaurants, the return to travel, and an effective vaccination campaign could be some of the factors behind the high inflation figure.

Inflation Not Back to Pre-Covid 19 Levels

The increase in travel, coinciding with the arrival of summer, has pushed up prices in the hotel and airline sectors. Airfares rose by 24.6% while hotel prices increased by 16.9% in June compared to the same period last year. However, the rise is not in line with the same period in 2019. Prices in these two sectors remain below levels seen at the start of COVID 19.

The automotive sector has been another sector that has recorded an increase in prices. New car prices have risen by 5.1% in June while used car prices have soared by 41.3% compared to the same period in 2019.

All Eyes on the Fed

The higher-than-expected uptick in inflation data puts a spotlight on the Federal Reserve and its chairman Jerome Powell who will address the Congress tomorrow. The Fed will have to analyze the new upturn in-depth and decide accordingly. In recent months, the Fed’s rhetoric had not changed as the Fed continues to claim that the inflationary data is “transitory”. Investors are likely to be on the lookout for tomorrow’s analysis.

Oil Falls, Gold Holds Steady

Market reaction to the higher-than-expected inflation data has been swift. In Wednesday morning’s Asian session, the S&P 500 was down 0.4% and 10-year Treasuries were down about 1.4%. The dollar lost its gains. Gold held steady at $1813.46 an ounce.

West Texas Intermediate (WTI) crude oil was down 0.4% at $74.92 a barrel. The rolling average of US oil product supply reached its highest seasonal level in three decades on July 2. Rising demand for plastics, lubricants, and derivatives is helping prices to recover. This demand rebound puts global supply at risk amid ongoing OPEC+ disputes between its member countries. The EIA United States Crude Oil Stocks Change data is scheduled to be released today.

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