The Daily Market Report: Inflation Ticks Up, But Is That Good or Bad?

USAGOLD/Peter Grant/09-14-17

Gold is consolidating within the recent range, having rebounded from earlier intraday downticks. Persistent political and geopolitical tensions continue to offer support to the yellow metal.

Slightly warmer than expected consumer inflation data for August pushed gold briefly to new 2-week lows. However, hopes that higher inflation may insight the Fed to raise interest rates one more time this year seems to be negligible.

The probability of a rate hike when the Fed meets next week remains virtually nonexistent. The odds of hike in December have returned to about a 50/50 proposition.

Greg Ip of the Wall Street Journal wrote an article yesterday that says that trend inflation is now 1.5%. It’s the new “normal” and the Fed has created asset bubbles by maintaining the 2% target.

Ip contends the Fed has two options: They can continue to force the issue and let the bubbles in stocks and real estate continue to inflate, or they can “ditch the 2% target and accept 1.5% as the new inflation trend.”

Both options are unappetizing, but the second distinctly more so. If Ms. Yellen eventually concludes lower inflation reflects a trend rather than noise, prepare for unemployment to drop much more and interest rates to stay low for a lot longer — with an attendant rise in financial and economic volatility. — Greg Ip

“Lower trend inflation has much graver implications for the economy than appreciated,” Ip warns. Giving up on the 2% target would also deal a rather severe blow to Fed credibility.

The Fed has essentially painted themselves into a corner. Getting out of that corner is likely to have dire consequences.

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