The drop in inflation after a four-decade high of 9.1% in June might be good for risky assets such as shares and cryptocurrencies. Bitcoin and Ethereum both increased in value in response to the news.
Bitcoin Up on 8.5% CPI Print
Inflation in the United States may have already peaked.
According to the most recent Consumer Price Index data by the United States Bureau of Labor Statistics, inflation fell to 8.5% in July, falling short of experts’ estimates of an 8.7% print.
The US inflation rate in the last 10 years. Image: US Bureau of Labor Statistics
According to the research, fuel and energy prices declined, offsetting increases in food and shelter. The fuel and energy indices fell 7.7% and 4.6%, respectively, month on month, while the food and housing indexes gained 1.1% and 0.5%, respectively. The core CPI, which excludes volatile energy and food costs, climbed by 0.3% during the same time.
The current print is a 60 basis point month-on-month fall from June’s four-decade high of 9.1%, suggesting that inflation may have peaked. The Federal Reserve has pledged to combat increasing prices with four straight interest rate rises in recent months, with a 2% CPI target. Though current levels are still far from the Fed’s goal, this month’s slowdown may increase market expectations of a future monetary policy reversal by the United States central bank.
Given the Fed’s explicit mandate of ensuring maximum employment and price stability, last Friday’s positive jobs report and the decline in inflation suggest that the central bank afford a less aggressive tightening policy in the future and ensure a “soft landing.”
This indicates that the Fed may use less harsh methods to reduce inflation to its target rate of 2% while avoiding a deep economic crisis or depression. Because the market is forward-looking, it soon begins pricing in a potential Fed dovish U-turn by shifting from risk-off to risk-on. Such a situation has traditionally performed best for assets at the bottom of the risk curve, such as stocks and cryptocurrencies.
All things considered, the risks of a lengthy bear market remain considerable. The European energy crisis continues and is predicted to deepen this winter. Potential Russian gas cutoffs might plunge several Russian energy-dependent European nations into severe economic crisis, leaving their population with little money for discretionary spending such as stock or cryptocurrency trading.
A similar situation would put the European Central Bank in a difficult position, as rising energy costs would exacerbate inflation. If the ECB responds to increasing prices by raising interest rates, Europe might enter a recession.
Bitcoin and Ethereum both surged after the CPI data was released. According to CoinGecko data, Bitcoin has reached $23,780, and Ethereum has reached $1,780, bringing the global cryptocurrency market capitalisation to roughly $1.17 trillion. The market reached $3 trillion in November 2021, leaving it 61% short of its peak.