The cost of living in the UK increased by 10.1% in July, according to government data released on Wednesday, marking the first instance of double-digit inflation in a significant country post-COVID 19 and offering a new indication of global pricing pressures.
Food prices push inflation into double-digit hikes. Image:seekingalpha
Inflation has been underpinning a key bitcoin (BTC) market narrative over the past few years. The study might add urgency to economic arguments among crypto experts.
Former Wells Fargo top economist and founder of Dynamic Economic Strategy, John Silvia, stated that more significant inflation in the United Kingdom might worsen pricing pressures overseas, particularly in the United States.
There is a conflict between the Federal Reserve and Bank of England policy expectations.
This year, the Bank of England has raised interest rates six times. The 50 basis point rise in August was the most significant increase since 1995. According to the UK central bank’s projections, inflation is predicted to reach 13% later this year, prompting a more rapid rise in interest rates.
Faster rate rises by the BOE might raise demand for fixed-income assets in the UK, which could bolster the pound’s value on foreign currency markets.
In contrast, the US currency will be weaker, making US consumers pay more for imports in terms of the dollar, which might contribute to domestic inflation. If the Fed responded with more aggressive rate rises, riskier asset markets would undoubtedly experience pressure.
Crypto assets are one of the riskiest asset classes, and from the beginning of 2020, bitcoin traders have paid particular attention to inflation dynamics.
Bitcoin was a hedge against inflation due to the initial blockchain code’s preprogrammed issuance rate. In practice, however, genuine inflation reports have caused central banks to slow down or reverse money creation and tighten monetary conditions to prevent economies from overheating. This has put downward pressure on the value of riskier assets, including stocks and cryptocurrencies.
After the US consumer price index (CPI) became lower, the value of the British pound increased. In light of recent UK inflation, the pound may strengthen more, mainly if the Federal Reserve only boosts the federal funds rate by 50 basis points in September.
The current interest rate in the United Kingdom is 1.75%, but traders estimate borrowing prices to reach 2% by the end of the year and surpass 2.6% by the end of 2023.
The federal funds rate in the US is now 2.25%, but markets have begun pricing in less aggressive rate rises in the coming months. The July Federal Open Market Committee meeting minutes, due for release on Wednesday at 2:00 p.m. ET, might provide markets with further clarification on this matter.
While inflation in the United Kingdom continues to soar, the US economy has experienced some reprieve, with the latest CPI indicating a slowing in the rate of price increases. The question is whether price hikes are slowing or if the most recent statistic was only a short reprieve. A further possibility is that prices will remain elevated at the present level.
According to Brian Coulton, chief economist at Fitch Ratings, this year’s growth in services inflation indicates that inflation is widening and becoming self-reinforcing in tight labour markets.
This is undoubtedly the portion of the CPI basket over which the BOE has the most influence, which is too high and growing. Recent US CPI data revealed a similar tendency.