Inflation is starting to trickle into the economy as a tight labor market and high oil prices force prices higher. Gold is set to run higher as inflation strikes back.
Headline inflation climbed 0.2% month-on-month in April according to the Labor Department. That puts inflation at 2.5% year-on-year. This is still a moderate rise in inflation but the trend is clear. Inflation is going up.
Moreover, a number of important lead indicators point to higher inflation ahead.
First off, unemployment in the United States has fallen to a paltry 3.9%. That’s less than half where it was about a decade ago and is now near a 17-year low.
This is traditionally a very powerful indicator of rising inflation because low unemployment means businesses will need to pay higher wages going forward to attract new employees. This inevitably translates to rising prices across the economy and higher inflation.
On top of that, oil prices have run up strongly recently – topping $70 a barrel at Friday’s close. That’s a healthy 16.5% rise since the start of the year.
Rising oil prices matter to the economy and inflation because oil is the quintessential industrial commodity. Accordingly, it contributes to rising costs (and prices) because of its widespread use in transportation of goods and as a raw material.
The combination of rising oil prices and wages will push inflation higher in the coming months.
Gold is set to run higher as inflation rises
The last time we saw inflation rising rapidly like this was back in 2011. Inflation more than doubled from 1% to 2.2% by year-end.
This sudden rise sent investors piling into gold. The yellow metal climbed an astounding 32.6% and peaked at $1,884 an ounce in 2011.
Gold is headed higher this time around also. The yellow metal could easily rise up to 10% over course of next year. That would put it around $1,440 per ounce.