As the Fed keeps hopes alive for at least one rate cut this year, metals investors are weighing the inflation outlook.

Gold and silver markets have recently been giving back some of their impressive gains this year. So far, it looks like a normal correction after a big rally. 

The summer months often deliver choppy chart patterns for gold and silver, but that isn’t always the case. The rally could resume at any moment.

This week gold prices are up 1.5% to trade at $2,340 an ounce. Silver is roughly flat, with spot prices here on Friday morning near $24.40 an ounce.

On Wednesday, the Federal Reserve left interest rates unchanged as expected. Despite the latest Consumer Price Index data showing price pressures easing slightly for the first time in months, Fed policymakers acknowledged that inflation remains too high.

Some in the financial media celebrated the fact that the CPI showed no monthly increase in May. That doesn’t mean consumer prices have stopped rising, of course. On an annual basis, the CPI is still running at 3.3%. 

That doesn’t exactly show the Fed is on its way toward meeting its price stability mandate. It shows that inflation remains somewhat sticky. Nevertheless, Fed officials continue to project progress on the inflation front and expect to be able to cut rates once, maybe twice, later this year. 

Inflation pressures appear to be easing slightly according to official measures. By alternative measures, general price levels are rising by much more than 3.3% -- as millions of people who are facing soaring costs for housing, food, healthcare, and insurance can attest.

Behind the backward-looking numbers on prices, oil, metals, and other commodities are showing signs of strain that could lead to big price increases down the road.

One of the most psychologically significant and politically sensitive inflation indicators is the price of gasoline at the pump. 

Gas prices have yet to see a summer driving surge. In fact, they came down a bit in late Spring.

Still, motorists in high-tax states such as California are having to fork over as much as $7 per gallon in order to fill up their vehicles.

Crude oil prices have managed to avoid hitting the headline-inducing $100 per barrel level over the past two years. Supply has been artificially boosted by the Biden administration's curious decision to drain unprecedented volumes from the strategic petroleum reserve. Nearly 300 million barrels of oil have been lost, bringing the SPR to its lowest level since 1983.

Republicans accuse President Biden of raiding the SPR for political purposes. They say he is trying to manipulate energy prices ahead of the election, leaving America vulnerable in the event of an actual emergency.

Unfortunately, inventory depletion isn't unique to the oil market. Across a broad basket of commodities, we are seeing available supplies either shrinking or not growing fast enough to keep pace with demand.

In the agricultural sector, drought, flooding, and other extreme weather conditions are threatening farm harvests. Meanwhile, diminished cattle herds mean beef prices won't be coming down anytime soon.

In the metals space, major supply deficits loom for copper, silver, platinum, palladium, and other scarce elements that are difficult and expensive to extract from the earth. 

Those who believe inflation is headed lower could be in for a nasty surprise -- one that gets delivered by strained commodities markets in the months ahead.

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