Main Street Macro: All that glitters

Last week’s hotter-than-expected inflation report surprised and rattled investors. The Consumer Price Index accelerated by 0.4 percent in March from the previous month. After a months-long slowdown,  price increases in February and March reached their highest level since September and put the annual rate of inflation at 3.5 percent, firmly out of reach of the Federal Reserve’s 2 percent target.

The two biggest drivers of inflation last month were shelter and gas prices, which accounted for half the monthly increase. But the uptick in inflation comes at a time when commodity prices overall, not just energy, have taken off. The price of gold and copper, which serve as key indicators of the health of the economy, have surged in 2024.

Gold and copper prices typically send very different signals about the economy.  Which is right? Well, it’s complicated.

Copper: Growth is strong

Copper underpins industrial production globally. The metal is used in construction, electric vehicles,  appliances, and my new paella pan–the list is endless. 

Accordingly, demand for copper is tightly linked to economic growth. When economic output is growing, manufacturer and consumer demand for copper increases and prices start to climb.

Copper prices have been on the rise since October. In March, they reached their highest level since May 2022.

But while copper is signaling that the economy is strong, gold is saying something altogether different.

Gold: Risks abound

Gold prices, too, are surging this year, but for a different reason. While gold also is used in production, its application is more limited. Gold prices are driven mainly by investors looking for a safe haven, an asset that retains or even gains value when the economy slows or contracts.

Despite the fact that few economists expect a recession this year, gold prices reached a record high this month. Investors might be trying to protect against inflation or simply trying to time the market for financial gain. Either way, recent price increases could be channeling concern that it will be difficult for the central bank to bring inflation down to 2 percent this year.

My take

Commodity prices by nature are volatile, and the history of gold in particular makes it an unreliable predictor of the direction of the economy. Still, gold and copper prices provide interesting pieces in our mosaic of data on what investors think of the economy right now.

We’ll turn from the commodities markets to focus on the consumer this week, when new data on retail and home sales will add to our economic mosaic.

While we wait for the economic picture to come into better focus, it’s safe to say that while a recession seems unlikely, too-high inflation and higher interest rates could be with us for longer than investors might have expected heading into 2024.