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Inflation Continues to Accelerate, Boosting Gold – 17 February 2022

British and Canadian CPI data came in higher than expected, increasing negative real interest rates, and making Gold and other commodities more attractive to traders.

February 2022 CPI Data Releases

Following last week’s release of US inflation data which showed the annualized rate at a 40-year high of 7.5%, it was the turn yesterday of the UK and Canada to release their respective CPI data points.

The British CPI release came first and showed inflation increasing at a rate of 5.5% which is the highest recorded level since 1992. The rate was slightly higher than the consensus forecast of 5.4% which was also the previous month’ annualized inflation rate. Analysts had expected the annualized rate to hold steady at 4.8%.

The Canadian CPI release showed a month-on-month increase of 0.9%, notably higher than the 0.6% which the market had been expecting. It was also considerably higher than the previous monthly change, which was a deflation of 0.1%. This equates to an annualized rate of 5.1%.

The data reinforces the clear trend we see in G7 nations of historically high and increasing levels of inflation, with some momentum continuing in the rise.

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Reaction to UK CPI Data

Many analysts now expect UK CPI to reach as high as 8% in April, due to rises in energy prices which have already been announced but have not yet taken effect. The Bank of England has said it expects inflation to peak at about 7% in the second quarter of this year.

The data increases the likelihood that the Bank of England will hike rates again next month. However, the release barely affected British markets: the Pound hardly moved, although it has risen a little against the US Dollar. The major British stock market index the FTSE 100 lost a little value, but this was well within the normal range of fluctuations. So, it seems the higher inflation has not materially affected the chance of another rate hike in the view of the market.

Reaction to Canadian CPI Data

Analysts generally expect Canadian inflation to continue rising over the coming months and expect that this will trigger rate hikes by the Bank of Canada. A series of four rate hikes of 0.25% each is expected over the coming months. There is some question over whether one (probably the first) of these hikes might be by 0.50%, but most analysts see that as unlikely to happen.

Despite this news of increasing inflationary pressure, Canadian markets barely reacted, with the Canadian Dollar and TSX stock index barely changed over the past day.

What Does This Mean for Traders?

The high inflation data from the UK and Canada is most interesting as a general phenomenon occurring in the most developed countries, rather than as something specific to these markets or currencies. It shows that inflation is increasing worldwide, and its momentum does not yet seem to be slowing.

Another implication of the current combined high inflation / low interest rate environment is a negative real interest rate. A saver in the United States, for example, can only receive a very low risk-free return, while inflation currently erodes the value of each dollar by 7.5% every year. This effectively forces everyone to either accept the depreciation of their savings or to become a speculator. This may make precious metals such as Gold very attractive, and we do see the price of Gold currently breaking to multi-month highs. Gold has historically tended to perform well during periods of high inflation and negative real interest rates.

High inflation has another effect: it implies that basic goods and raw materials are getting more expensive, so in this environment, it may be wise to invest in other commodities besides Gold. For example, Soybeans, Corn, and Crude Oil are all currently on a bullish tear.

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