On Thursday, the United States reported that its producer price index rose 6.3% in the year to September, far above the 5.3% that economists expected. Yet gold rose more than 1% to about $4,148 per ounce on the same day. If you are not sure what the producer price index is, or why gold would go up on bad inflation news, this guide explains both points in plain language.
What the producer price index measures
You may know the consumer price index, which tracks what households pay for goods and services. The producer price index, or PPI, tracks what businesses receive for what they sell, including fuel, raw materials and wholesale goods. Because companies often pass higher costs on to customers, a rise in producer prices can be an early warning that shop prices will rise later.
According to FXStreet, headline PPI rose 6.3% year on year, and core PPI, which leaves out food and energy, climbed to 5% from 4.8%. Kitco adds that the monthly gain was 1.3%, the biggest since March 2022, and that producer energy prices jumped 10.8%, with gasoline up 20.3%.
Why this follows a hot consumer report
A day earlier, US consumer prices rose 3.7% year on year, up from 3.4% and above the 3.6% forecast, as reported by FXStreet. Core consumer inflation rose to 2.6%. Gold fell nearly 2% that day to a five-day low of $4,073 as traders raised their bets on a Federal Reserve rate increase.
Two inflation reports in two days both pointed the same way, which is why markets paid close attention. Energy prices were a major driver. Brent crude traded near $104 per barrel, and US petrol prices have been at record levels.
So why did gold rise?
Because the market had already reacted to the surprise. Investors expected a high producer reading after the consumer data, so the shock was partly priced in. What changed the direction was the bond market. The 10-year Treasury yield dropped 10 basis points to 5.089%, and the US dollar index fell 0.4% to 102.11, retreating from an 18-month high.
Falling yields help gold because the metal pays no interest. When bonds pay less, the cost of owning gold falls. A weaker dollar helps because gold is priced in dollars, which makes it cheaper for buyers using euros, yen or Singapore dollars.
Yields fell because stock markets dropped. Selling in AI-linked technology shares sent investors towards government bonds, and Kitco reported that Nasdaq futures fell about 1.2% and South Korea's Kospi dropped about 7.6%.
What markets now expect from the Fed
Money markets price about a 26% chance of a rate increase at the 27 to 28 October meeting, and about a 92% chance of an increase by December. Fed officials Mary Daly and Michelle Bowman said an immediate hike might not be necessary, which cooled October expectations. Fed Chair Kevin Warsh is due to speak at the IMF annual meetings in Bangkok on Friday, and traders will look for clues about the December decision.
Where the gold price stands
Gold reached a weekly low of $4,073 on Wednesday and has recovered above $4,100. Analysts see resistance at $4,200 and then near $4,245, with support at $4,100, $4,073 and $3,996. TD Securities expects strong buying from ETFs and central banks between $4,000 and $4,100. You can follow the live price on Trading Economics. Gold remains about 26% below its January record of $5,598.58.
Other data from Thursday
US retail sales rose 0.8% in September against a 0.3% forecast, although sales excluding autos and fuel rose only 0.2%. Weekly jobless claims were 199,000, just below the 200,000 forecast. Together with the inflation figures, the data show an economy that is still spending while prices rise quickly.
What this means if you are buying gold jewellery
For most shoppers, one inflation report should not decide a purchase. It helps to know that prices can jump on days with major data releases, so people who are watching the price may prefer to buy on quieter days. When you shop, compare the price per gram with the live gold price. Ask how the workmanship charge is calculated, since it is added to the value of the gold. Check the purity mark and weight on the receipt, and ask about exchange terms.
Lightweight pieces contain less gold, so market swings change their final price by a smaller amount than for heavy chains. Whatever you choose, set a budget first and avoid stretching it out of fear of missing a price move.
The main lesson is that gold responds to the chain of events that follow inflation, especially interest rates, bond yields and the dollar, rather than to the inflation number alone.
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