A Second Wave of Inflation is on Its Way! What Does That Mean for Gold?

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Published: Mar 1, 2023, 14:16 UTC

It's official: Central banks across the world are behind the curve on inflation yet again, as the latest wave of global economic data shows price pressures continue to surprise on the upside.

Fight Against Inflation Remains Far From Won

The latest inflation figures from the United States, the United Kingdom and the European Union are all showing evidence that the fight against steep price rises is far from won – fanning fears that elevated inflation could become stubbornly entrenched into many parts of the economy.

While global inflation has retreated from multi-decade highs, it still remains uncomfortably high and close to the highest it’s been for a generation.

Recent data showed, annual inflation the United States climbed for a second consecutive month to 6.4% in January – five times the November-to-December increase. While in Europe, inflation is currently holding at 8.5% after peaking at 10.6% in October. Elsewhere, in the United Kingdom, which faces weaker economic prospects than its peers, the rate of price increases is currently running at 10.1% from a recent high of 11.1%.

All of that comes despite one of the most aggressive interest rate hiking campaigns ever seen by the Fed and its global central-banking peers since the 1980s.

According to economists; recent economic data releases are inserting more forcefully the notion of “sticky inflation” into economic discussions. This comes after policymakers on both sides of the Atlantic made an embarrassing error of misjudgement – earlier this year – by prematurely declaring victory on inflation too soon.

Another key factor in the global “inflationary equation” that is being significantly overlooked is China’s reopening.

After nearly three years of strict coronavirus controls, China’s rebound is picking up steam faster than anyone may have expected – stoking demand for inflation-driving Commodities and undercutting the West’s efforts to tame the biggest price spikes in four decades.

Data released on Wednesday showed China’s manufacturing activity expanded at the fastest pace in more than a decade in February. China’s manufacturing PMI smashed records – surging to 52.6 from 50.1 in January – the highest reading since April 2012.

The big question now is will the world be faced with a “second wave” of inflation this year?

Only time will tell, however one thing we do know for certain is that there is a strong correlation between inflation and Commodity Prices. When inflation accelerates at a red-hot pace, so does the prices of Commodities.