Will Tonight's US CPI Bring a Surprise or a Shock?

The coming night is set to witness a pivotal moment for the U.SFederal Reserve as it grapples with the implications of the latest Consumer Price Index (CPI) dataAnalysts and investors alike are holding their breaths, contemplating whether this data could serve as a significant catalyst for a bullish turn in gold pricesSpeculation grows around whether the reported figures will signal a stabilization of inflation or indicate a renewed threat to the economic landscape.

The highly anticipated CPI report, slated for release on Wednesday at 9:30 PM Beijing time, is expected to unveil an uptick in annual inflation rates, rising from 2.6% in October to approximately 2.7% in November, with a month-on-month increase projected at 0.3%. Such statistics are crucial as they reflect the enduring pressures on consumers and the broader economyRemoving the volatile categories of food and gasoline produces a core CPI, which is also expected to rise, maintaining a consistent annual increase of 3.3% for the fourth consecutive month

This trend begs the question: as the Federal Reserve aims for a 2% inflation target, how will policymakers respond to the persistent, high cost of living for American households?

Dan North, a senior economist at Allianz Trade Americas, stated that the data does not suggest a victorious battle against inflationInstead, he emphasizes that inflation still looms, with no convincing indicators showing a path toward the Fed's goalIt is a stark reminder of the ongoing struggle, as rising costs in essential areas such as housing, medical services, and auto insurance serve as heavy burdens for many, especially those in lower income brackets.

The anticipation builds as the Bureau of Labor Statistics is also set to release the Producer Price Index (PPI) on Thursday, which is expected to reflect a slight rise of 0.2% month-on-monthThese upcoming reports greatly influence market psychology and the Federal Reserve's forthcoming monetary policy decisions

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Rick Rieder, chief investment officer at BlackRock's Global Fixed Income division, remarked on Friday that the CPI report now stands as another critical milestone in the Fed's policy adjustments.

Despite the sharp decline from a CPI peak of approximately 9% in June 2022, the lingering impact of escalating prices continues to strain the purchasing power of American consumersCore CPI has displayed a steady increase since July, after a period of declinesAnalysts at Goldman Sachs project that the CPI rise in November might stem from key sectors; they foresee a 2% month-on-month increase in car prices and a 1% rise in airfare, although some sectors like airline tickets are exceedingly volatile.

In contrast, Bank of America economists predict a slowdown in airfare costs, estimating a 1% decrease following consecutive monthly increasesThis divergence in predictions highlights the complex nature of inflation dynamics

Additionally, soaring auto insurance premiums are expected to contribute to inflation, with an estimated 0.5% rise in November alone, compounded by a 14% increase over the past year.

With the Fed's challenges deepening, the outlook remains tenuousWhile Goldman Sachs believes inflation could ease further with adjustments in the automotive and rental housing sectors, there are looming concerns about tariff policies which might hinder a complete recoveryThe proposed policies aimed at curbing imports—such as hefty tariffs, corporate tax reductions, and immigration limitations—could create additional inflationary pressures moving forward, complicating the Federal Reserve's potential rate adjustments.

According to Goldman, the core CPI inflation is projected to temper but will only reach 2.7% the following yearSimultaneously, the core Personal Consumption Expenditures (PCE) index, a crucial metric for the Fed's inflation assessment, is anticipated to decrease from its current level of 2.8% to 2.4%, still surpassing the 2% target

This situation creates a challenging environment for the Fed, which typically hesitates to lower rates when inflation figures remain elevated in tandem with strong economic growth rates near 3%.

Market sentiments currently forecast a 25 basis point rate cut by the Fed in December, with probabilities climbing from about 73% to 86%. Observers note that the labor market appears to be rebalancing, with supply constraints easing, yet expect inflation dynamics to remain stable next year as changes in tariffs, fiscal policies, and immigration constraints come into play.

Moreover, reports circulated by a Goldman team led by Jan Hatzius echo these sentiments, articulating that further easing of inflation in the coming year will be counterbalanced by potential escalations in tariff policiesEconomic teams from institutions like Wells Fargo have noted that the journey to maintain inflation near the 2% target is increasingly daunting, likening it to the final, difficult stretch of a marathon.

Notably, Allianz's North remarked on the Fed's intention to avoid creating market surprises when the consensus appears strong

Absent unexpected inflation surges, he thinks the Fed is likely firm on its targetsHe stipulates that for the Fed to consider lowering rates, the inflation figures must display a consistent trend toward the desired target, which current reports do not substantiate.

In the midst of all these fluctuations, gold markets appear to be responding to the evolving economic landscape, recently reaching a two-week highGoldman Sachs, reiterating a bullish stance on gold, contradicts the view that rising dollar strength would hinder gold's ascent to $3,000 per ounce by the end of 2025. Financial analyst Kyle Rodda from Capital.com illustrates that expected CPI figures could indeed pave the way for a Federal Reserve rate cut next week, an eventuality that might drive gold prices higher.

From a technical analysis perspective, indicators suggested that gold closed above its 50-day Simple Moving Average (SMA) at $2,670, breaking a pattern of consolidation that lasted for ten trading days