Consumer prices rose modestly in March amid signs a spike in gasoline costs was ebbing, but inflation still outpaced workers' earnings and threatened to undermine spending.
The Labor Department said on Friday consumer prices increased 0.3 percent last month. Gasoline prices rose 1.7 percent, a sharp slowdown from February when costs at the pump rose more than three times as quickly.
Still, workers' earnings fell 0.4 percent in March after adjusting for the increase in prices.
Other data showed consumer sentiment slipped in April as higher gasoline prices hit household budgets.
"The underlying problem of inflation outstripping wage gains remains. That is the danger for the economy in the long run," said Joseph Trevisani, a market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.
For the U.S. Federal Reserve, the reports gave mixed signals about how much room there might be to take new measures to boost economic growth.
The possibility of weaker consumer spending supports arguments for further stimulus, but the consumer price data suggested inflation might not cool as quickly as expected.
Core inflation, which strips out food and energy prices, climbed 0.2 percent, pushed higher by rising rents, medical care costs and used car prices.
In the 12 months to March, core CPI increased 2.3 percent after rising 2.2 percent in February. Barclays Capital said this reading could rise further this year.
The persistence of core inflation could reduce the Fed's maneuvering room for easing policy. "This could hem the Fed in," said Boris Schlossberg, head of research at GFT Forex in Jersey City.
Overall consumer prices rose 2.7 percent year-on-year, down from a reading of 2.9 percent in February.
The inflation data was in line with expectations and financial markets took their cue from abroad.
Government debt prices rose and stocks fell as renewed concerns over Spain's rising borrowing costs and disappointing Chinese growth data heightened concerns over the global economy.
Amid recent signs of weakness in the labor market, investors have been betting the Fed could unleash further monetary stimulus to boost growth, although comments by Fed officials this week suggested the central bank is on hold as it waits to see whether the recovery gains traction.
The Fed, which meets on April 24-25 to debate its policy course, cut benchmark interest rates to near zero in 2008 and has bought $2.3 trillion in bonds to push other borrowing costs lower. It has said it will probably hold rates super low until at least late 2014 to help the economy as it limps back from the 2007-2009 recession.
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Gold prices this week picked up again but are still far from last year's record $1,920.30 an ounce, reached in September.
The most-active June contract settled on the Comex Friday at $1,660.20 an ounce, for a gain of 1.8%, or $30.10, since the April 5 market close.
Given the economic volatility in 2011, last year was a banner year for gold prices. Fears of global market turmoil helped push the yellow metal to record highs.
While the long-term bullish outlook for gold remains, short-term pressures have halted its steady climb.
"Gold has found more support recently, but it doesn't have all of the catalysts in place to be driven substantially higher yet," Suki Cooper, an analyst at Barclays Capital, told Reuters.
Here's why this dip isn't the start of a bearish gold year, but a chance to stock up before gold prices thrive and head to $2,000 an ounce.
The Fed, India, and Gold Prices
On April 4, the U.S. Federal Reserve released the minutes from its March 13 meeting that focused on predictions for a stabilizing U.S. economy and low inflation. The Fed's forecast cooled talk of more monetary stimulus, and sent gold prices down about 2% last week.
The Fed expects U.S. economic growth to progress at a steady pace throughout the quarter. With moderate expansion rather than rapid growth or deflation, there's no need to curb borrowing, and interest rates will stay near zero.
This bodes well for the U.S. dollar, which usually puts downward pressure on gold.
It's no secret that a weakened dollar sends investors running to the real value of hard commodities. A stronger dollar does the inverse: it causes the big investors to be less cautious with regard to investments in liquid capital, creating a dip in gold prices.
Lagging Indian imports also have contributed to lower gold prices at the beginning of this quarter.
India is the world's leading consumer of gold. Last year alone, according to the World Gold Council, gold imports rose in that nation 1.1% to a record high of 969 tons. But this year imports have fallen, down 55% in the first quarter.
Part of the slowdown in India is due to a proposed tax for gold. Since March 17, Indian jewelers have been protesting a hike in the import duty on gold as well as the imposition of an excise tax on unbraided jewelry.
India's Finance Minister Pranab Mukherjee finally announced on April 5 that the government would address the excise tax on gold jewelry. Bullion traders and jewelers called off the strike just in time to resume selling ahead of the Akshaya Tritiya festival that occurs on April 24. Gold sales picked up in the days and weeks ahead of the celebration, as giving gold gifts is part of the tradition.
"Though too early to tell, the re-opening of the Indian jewelers for business last Saturday should bring out the pent-up demand," Austin Kiddle, director of London-based bullion broker Sharps Pixley, told Forbes. "The Indian consumers will gear up for the Akshaya Tritiya festival...as well as the wedding season. Physical demand, especially from India and China, is the key supporting factor for investment demand for gold."
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Earlier Thomson Reuters GFMS, the world's foremost research firm focusing on precious metals, launched its Gold Survey 2012.
For those weighing up the pros and cons of making a gold investment this year there were both bullish and bearish signals.
Here are some highlights that caught BullionVault's eyes (and ears) at this week's launch presentation:
1. Gold investment demand is expected to set a new record in 2012
GFMS expects gold investment demand to be the main driver of gold prices this year, as it was in 2011. Furthermore, the consultancy expects investment demand for gold to set a fresh all-time high of close to 2000 tonnes in gold bullion terms.
A key driver of gold investment, says GFMS, is likely to be ongoing loose monetary policies adopted by the world's central banks.
"A corollary of all this monetary largesse," says GFMS's global head of metals analytics Philip Klapwijk, "is fears about resurgent inflation, and that becomes all the more likely if oil prices motor higher should tensions get any worse between Iran and the US."
2. Physical gold investment demand continued to be strong last year
Investment demand for physical gold saw "an excellent performance" last year, Klapwijk told the audience at the London launch of 'Gold Survey 2012'.
Europe, China, Thailand and the Indian subcontinent all saw growth in physical gold bar investment (investors in North America, as Klapwijk pointed out, tend to prefer gold coins to gold bars).
On a global level, combined demand for coins and bars was 1543 tonnes – a 30% gain on 2010, and a new all-time record. Indeed, the majority of gold investment in 2011 took the form of physical investment, GFMS says.
The significance of this is that investments in physical gold tend to represents "stickier" investments than other forms of getting exposure to the metal (for example buying gold futures) – meaning it would probably take more for such investors to exit the positions they've built.
That said, there is obviously a limit to most investors' stickiness. A lot will depend on whether, as GFMS expects, the economic environment will continue to be supportive of gold investment, with negative real interest rates and fears of inflation prevailing in most parts of the world.
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