By
Steve Muchoki
April 19th, 2024
As inflation numbers touch a four-decade high, here’s a look at what it could mean for the crypto market.
On Wednesday, January 11, the US Labor Department released the country’s inflation numbers for December 2021. Inflation grew at the fastest rate of 7% for the first time in over four decades since 1982.
The 7% increase in the Consumer Price Index (CPI) refers to a 12-month period. However, on the monthly basis, the CPI surged by 0.5%. Interestingly, the inflation numbers were quite in line with the market expectations.
As per the economists surveyed by Dow Jones, the expected increase on an annual basis was 7%. However, the monthly expected increase was 0.4%. The surge in the CPI numbers comes amid the shortage of goods and workers. It also stems from an unprecedented inflow of money in the U.S. financial system through Congress and the Federal Reserve.
As the actual CPI data was quite in line with the expectations, thus stocks headed north during Wednesday’s trading session. On the other hand, the government bond yields remained mostly negative following the news. Speaking to CNBC, Brian Price, head of investment management at Commonwealth Financial Network said:
“The December CPI report of a 7% increase over the last 12 months will be shocking for some investors as we haven’t seen a number that high. However, this print was largely anticipated by many, and we can see that reaction in the bond market as longer-term interest rates are declining so far this morning.”
Fed officials are closely watching the inflation scenario panning out. The Federal Reserve is likely to increase interest rates four times this year in 2022. Thus, we could expect some volatility in the equity market going ahead. JPMorgan Chief Jamie Dimon foresees strong economic growth for the US in 2022.
What’s in Store for Bitcoin and Crypto
Soon after the inflation news, the Bitcoin price surged another 1% moving past $44,000 levels. The entire cryptocurrency market is also trading in the green with the market cap moving back to $2.10 trillion.
Many say that Bitcoin serves as an inflation hedge. However, with the Fed raising interest rates, the money usually tends to flow from more volatile assets like stocks, equities, etc. to less volatile assets like government bonds.
If inflation continues to get higher and stay longer than expected, we can expect the Fed to turn more aggressive on increasing the interest rates at a faster rate. Speaking to CoinDesk, Edward Moya, a senior market analyst at online brokerage Oanda, said:
“The Fed sees inflation lasting till mid-2022 and that is probably when they will let the balance sheet decline. The path of inflation may drive quicker rate hikes and a sooner start to shrinking the balance sheet, and that could be bearish short term for risk assets such as cryptos, but equities will likely feel more pain. There is still significant money on the sideline waiting to buy bitcoin, but many crypto traders are having a wait-and-see approach”.
Other market news can be found here.