Inflation recedes, markets applaud, and Costco gold sales go through the roof
Economic Insights
U.S. inflation saw a modest decrease in April, providing some respite to investors and the Federal Reserve after early-year data highlighted ongoing price pressures.
The consumer price index (CPI), which tracks the cost of goods and services across the U.S. economy, increased by 3.4% year-over-year in April, according to the Labor Department's most recent report earlier this month. Core prices, which exclude the more volatile food and energy sectors, rose 3.6% annually, marking the smallest increase since April 2021.
This report, aligning with market expectations, was welcomed by investors following three months of higher-than-expected inflation.
While the inflation report was positive, there still needs to be more evidence for the Federal Reserve to consider lowering interest rates anytime soon. Until there is a clear and consistent movement towards lower sustained inflation, the prevailing opinion across markets is that we can likely expect interest rates to stay where they are for some time.
So, what’s keeping inflation and spending elevated? The demand for data centers is one hot spot (driven by AI or artificial intelligence). Market analysts estimate up to $1 trillion in data center upgrades will occur in the coming years, which could require as much as 500 thousand to 1 million tons of copper through 2027 (with the need for copper in EV batteries another large driver this decade).
The demand for gold has also risen sharply, driving it to new recent highs. For proof of this latest development, you need look no further than retail innovator Costco, which sells $100 million to $200 million in gold bars per month. These are just two minor examples of too many dollars chasing too few goods, which is the primary driver of inflation at the most fundamental level.
Bottom Line: April inflation readings indicate that price pressures have not accelerated, providing further reassurances the Federal Reserve likely won't need to raise rates again.
And while the Fed's next move is more likely to be a rate cut rather than an increase, cutting rates this year is still in question if inflation decreases less than anticipated.
Fed officials are balancing two risks: easing too soon, which could boost spending and investment and prevent inflation from returning to the 2% target, and waiting too long to see the effects of tighter policy on labor markets, which could necessitate a series of traditional rate cuts often associated with economic downturns.
While the U.S. economy faces several headwinds regarding global economic volatility, the domestic markets still show remarkable resilience and strength. With the expectation of moderated growth, the forecast for real GDP growth in 2024 still hovers around 2.1% per the most recent Federal Reserve forecast (down slightly from 2.5% in 2023), indicating a more cautious expansion than last year, but an expansion nonetheless, which is critical to staying out of recessionary conditions. This outlook is optimistic but still cautious as the balancing act between managing inflation, navigating higher interest rates and fostering sustainable economic growth continues challenging the Fed and capital markets.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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