US Inflation at 6.8%. How Will It Impact Bitcoin's Price?
Welcome back.
It’s been a rather boring week as Bitcoin and other cryptos take a breather from last week’s bloodbath. But it was far from boring in terms of the new inflation rate. We’re currently at a whopping 6.8%, the highest since June of 1982. Let’s take a deeper dive into how bad things are and then discuss how the Fed’s response will affect risk-on assets like stocks as well as crypto.
The inflation rate has been skyrocketing since the start of the COVID pandemic and it’s showing no signs of stopping. Compared to October (yes, within just a month), we’ve seen the price of pretty much everything go up even more. Energy costs have gone from 30% to 33.3%, namely gasoline, 49.6% to 58.1%. Others include shelter (3.5% to 3.8%), dining (5.3% to 6.1%), food at home (5.4% to 6.4%), new vehicles (9.8% to 11.1%), used cars and trucks (26.4% to 31.4%), apparel (4.3% to 5%) and medical services (1.7% to 2.1%). More staggering and depressing data can be found at tradingeconomics.com.
If anything is clear, it’s that this inflation is far from transitory. It’s shown to be persistent and more consumers are becoming aware of its pernicious effect on everyday purchases. That’s why I think the Fed finally changed its tone recently. Chairman Jerome Powell said it’s time to “retire” the word “transitory” and that he expects conditions pushing inflation to last “well into next year.” It’s clownish that they have been denying all this to the public until now. No wonder people hate governments and big banks.
Tapering has already begun by the way. (Tapering is basically a massive bond-buying program designed to slowly pull back the stimulus the government had previously provided markets and the economy.) “The Fed had been buying $120 billion of bonds per month but began trimming that by $15 billion a month starting in November" (The Washington Post). They’ve been buying U.S. Treasuries and agency mortgage-backed securities (MBS) but they aim to further wind down its purchases to end the program by end of Q1 2022. They have another meeting this coming week, so stay tuned for that.
What’s really important, however, is what comes after the end of the program. Because that’s when rate hikes kick in. Simply put, “a Fed rate hike increases the cost of funds for banks—a cost they ultimately will pass on to their customers, both individuals and businesses” (Magnify Money). With higher borrowing costs creating deflationary pressures, individuals and businesses will likely lower their risk appetite and pull money from risk-on assets. I believe crypto is not going to be an exception from this ripple effect.
How drastic will the impact be? I have no idea in regards to the severity. But I conjecture that the impact will be negative, not positive. Even though Bitcoin is widely considered as an inflation hedge and many seem to believe it will continue to appreciate (since inflation = fiat losing power), it’s still a risk-on asset and has a relatively positive correlation with stocks. Meaning, if stocks tank, so will Bitcoin and the rest of the crypto market. That’s my perspective. While I believe moderate inflation is good for stocks and commodities, it’s the Fed’s response to extreme inflation that actually triggers the economy to enter a risk-off mode. The beginning of rate hikes could be the beginning of a long bear market. More on this next week once we hear more from Mr. Powell.
Thanks for reading and see you soon.