Gold price fell 2.7% as rising US inflation in December strengthened expectations of a sharp Fed tightening

Gold prices fell sharply on Tuesday. The decline was driven by a stronger US dollar and a higher-than-expected inflation reading, further reinforced by hawkish comments from a Federal Reserve (Fed) official.

As of 15:40 ET (20:40 GMT), spot gold had dropped 2.7% to $4,030.33 per ounce. Gold futures fell 1.9% to $4,037.95. Meanwhile, the dollar index, which measures the US currency against a basket of six major currencies, rose 0.6% to reach 102.25.

Probability of a 50-basis-point Fed rate hike in December rises

Investor attention was focused on the US October Consumer Price Index (CPI) data. According to the Bureau of Labor Statistics, headline consumer inflation rose 0.4% month-over-month in October, following a 0.6% increase in September. Economists had expected a 0.3% rise.

Core inflation, which excludes volatile food and energy prices, came in at 0.3% month-over-month, unchanged from the previous reading. This figure also exceeded analysts' forecast of 0.2%.

Due to the US government shutdown in October 2025, annual inflation figures were not included in the CPI report.

Even before the inflation data was released, market sentiment had already been influenced by comments from Fed Board member Christopher Waller. Speaking at an event in London, he voiced support for tighter monetary policy, noting that he would back a rate hike even if inflation data had not come in higher than expected. He added that if the data confirmed inflationary pressure, a 50-basis-point hike could also be justified.

The higher-than-expected inflation reading followed strong US labor market data released on Friday. Taken together, these factors have strengthened expectations for a Fed rate hike in December. The main uncertainty now lies in the size of the increase: according to the CME FedWatch tool, the market is pricing in nearly a 10% probability of a 50-basis-point hike.

According to Danni Hewson, Head of Financial Analysis at AJ Bell, the pace of energy price growth slowed significantly in October, though high fuel costs have spilled over into other sectors of the economy. She noted that although the full picture and year-over-year comparisons were unavailable due to the government shutdown, the published figures pointed to intensifying second-round inflation effects. Core inflation also came in higher than the level some Fed officials would consider acceptable.

Why do higher rates affect the price of gold?

Expectations of rising interest rates typically weigh on gold, since the precious metal generates no interest income. As a result, higher rates make income-generating assets relatively more attractive to investors.

In addition, expectations of tighter monetary policy often support a stronger dollar. A strong dollar makes gold more expensive for investors holding other currencies, adding further pressure on demand and price.