Gold and US inflation: why a hot CPI and PPI did not stick

Key points

• US consumer prices rose 3.7% in the year to September, producer prices 6.3%
• Gold fell 1.3% on CPI day, then rose 1.6% the day after the producer price report
• Traders pushed the expected Fed hike from October to December rather than dropping it
• With 10-year yields near 5.1% and core inflation at 2.6%, real rates stay a weight on gold

US inflation and gold had a strange week. September's consumer and producer price reports both came in hotter than forecast, yet gold ended only 0.7% lower at about $4,166. Our read: the market decided the Fed will still hike, just in December rather than this month, and falling bond yields did the rest.

Why it matters: Gold does best when inflation rises faster than interest rates. This week rates looked set to keep pace, which caps rallies, but not fast enough to force a fresh sell-off.

What did the September inflation figures show?

Consumer prices rose 0.6% in September and 3.7% from a year earlier, up from 3.4% in August, the Bureau of Labor Statistics said on Wednesday 14 October. Forecasts were 0.5% and 3.6%. Core prices, which leave out food and energy, rose 0.3% in the month and 2.6% on the year. Only 11 of 73 economists in Bloomberg's survey had pencilled in a 0.3% core rise.

Thursday's producer price index was hotter still: up 1.3% in the month against a 0.5% forecast, and 6.3% on the year. Retail sales grew 0.8%, but only 0.2% once petrol stations are stripped out.

Look at what is driving it: energy. Brent crude traded above $100 a barrel all week and touched $110 on Friday after attacks on ships near the Strait of Hormuz. Core inflation is rising too, but at a much slower pace.

How did gold react?

Gold fell 1.3% on Wednesday to about $4,106 at the New York close, with a low near $4,076. On our price data going back to 1968, that fall was worse than 92% of all trading days. Silver lost about 6%. Kitco reported that the odds of a Fed hike at the 27 to 28 October meeting jumped from about 20% to nearly 40% within hours of the release.

Then the market changed its mind. Gold rose 1.6% on Thursday, the day of the producer price shock, a gain bigger than 93% of trading days since 1968 on our data. Two moves that size, back to back and in opposite directions, are rare for a metal that has been unusually calm: its 30-day volatility is about 16% a year, against a one-year average of 25%.

Why did the inflation shock fade so fast?

Three things pulled gold back up.

Bond yields fell

A sell-off in AI and chip stocks on Thursday sent money into Treasuries, and the 10-year yield fell sharply. It ended the week near 5.09%, CNBC reported, against about 5.24% a week earlier. Every drop in yields lowers the cost of holding gold, which pays nothing. Our guide on why gold falls when rates rise walks through that trade-off.

The Fed sounded patient

Michelle Bowman, the Fed's supervision chief, and Mary Daly, who runs the San Francisco Fed, both said the central bank could wait for a clearer picture before the October meeting. Boston Fed president Susan Collins said it would be "appropriate to raise rates a bit further before the end of the year". On Friday, Chair Kevin Warsh told an audience in Bangkok he did not believe in "pre-judging meetings". By the end of the week, traders put the chance of an October hike at about 16% and a December hike at about 89%.

The dollar ran out of steam

The dollar index hit an 18-month high on CPI day and gave the gain back over the next two sessions. A softer dollar makes gold cheaper for buyers paying in euros, rupees or yuan.

Is US inflation still a problem for gold?

Yes, and that is why gold could not climb through $4,200. The Fed's own projections, published after its 16 September hike to 3.75% to 4%, pointed to one more increase this year. The market now agrees and has pencilled it in for December.

Gold has already paid for that hike once. Since the Fed raised rates on 16 September, gold has fallen about 3.7%, from about $4,328 to $4,166 on our data, including a 2.7% one-day drop on 28 September. A second hike that is fully priced by December should do less damage, because markets move on surprises, not on what they already expect. The risk is a third hike: Fed projections do not show one, and a shift in that view would be news gold has not priced.

The bigger issue is real yields: what a Treasury pays after inflation. With the 10-year near 5.1% and core inflation at 2.6%, investors can lock in a return of roughly 2.5 percentage points above core inflation, on our rough calculation. That is a high bar for a metal with no yield, and it helps explain why gold sits about 23% below its record close of $5,426 from 29 January. Our page on gold and inflation explains why gold protects against inflation over decades but often lags when rates climb faster.

Energy is the wild card, and the Fed knows it. Warsh called this week's mix of higher energy costs and an AI investment boom "a shock" that central bankers have to recognise. If oil keeps rising, headline inflation stays high and the case for more hikes grows, which is bad for gold. If the shipping attacks ease and crude falls back below $100, headline inflation should cool, hike bets would fade, and gold would have room to move above $4,200.

What would change our read?

Three things. A jump in core inflation, not just energy, would make the December hike certain and could revive October bets. A sustained fall in 10-year yields below 5% would help gold more than any single inflation print. And any sign from the Fed that it will look through an oil shock would remove the main thing holding gold back. More on how each Fed move feeds into the price is on our Fed and gold page.

What to watch

• 23 Oct: US flash purchasing managers' surveys, including their price gauges
• 28 Oct: Fed rate decision, after the meeting that starts on 27 October
• 29 Oct: US third-quarter GDP, advance estimate