Financial investors focus on tomorrow’s CPI inflation index report

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The most important event of this week will take place tomorrow when the January Consumer Price Index report is released. Last month, the CPI index hit a 40-year high in December at 7%. On January 28, the BEA announced that the PCE index had risen to 5.8% in December, bringing the preferred index used by the Federal Reserve to a 40-year high. According to analysts polled by Bloomberg, tomorrow’s report is expected to hit an epic 7.3% from a year ago. Other polls predict an increase in inflation of 7.2% compared to last year.

A possible indication of what tomorrow’s report will reveal can be found in a survey released by the NFIB (National Federation of Independent Businesses). The survey polled small businesses and found that small businesses increased their average selling prices by four points to a net increase of 61% (seasonally adjusted), the highest value since the fourth quarter of 1974.

A consumer survey by accounting firm KPMG said consumers are looking at a 22% increase in their food costs compared to prices before March 2020.

The strongest indication of what the report will reveal was a warning from the White House today that consumer prices could top 7% in January. White House press secretary Jen Psaki spoke to reporters: “We expect high annual inflation in tomorrow’s data. Above seven percent, as I think some are predicting, that wouldn’t be a surprise.

Rising inflation levels will prompt the Federal Reserve to become more aggressive with interest rate hikes this year. However, two issues arise with respect to rate hikes. The first is that the Federal Reserve is undoubtedly behind the eight ball when it comes to responding to inflationary pressures. The error made by the Federal Reserve was to believe that the inflationary pressures were transitory and would subside quickly. They waited too long before tackling this problem.

Second, and most important, is the fact that the extreme level of inflation is due to supply chain bottlenecks. To bring inflation levels down to acceptable levels, this problem needs to be addressed. Simply raising interest rates won’t affect the supply chain bottlenecks that are contributing to rising inflation to its highest level in 40 years.

The truth remains that given current inflationary pressures, whether they remain at 7% or reach 7.3% as expected, the task of reducing inflation to the Federal Reserve’s 2% target will be a multi-year process. More so, it is supply chain bottlenecks that need to be addressed alongside interest rate hikes to effectively curb inflation growth. As such, if high inflation remains persistent over the next year or two, this will provide strong tailwinds providing continued bull market sentiment for gold.

Wishing you as always good exchanges and good health,

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