The consumer price index rose in December as anticipated, which could prove to be good news for the risk assets badly affected by last month’s shift in Federal Reserve rates.
Bureau of Labor Statistics reported Wednesday that the Consumer Price Index, which measures the price change of a wide range of products and services over a 12-month period ending in December, increased by 2.9%.
“Markets had been losing some faith on the disinflation thesis and the idea of Fed rate cuts,” Grayscale’s head of research Zach Pandl explained Decrypt. “I think this report puts Fed rate cuts back on the table.”
Wednesday’s inflation print was highly anticipated, following data that suggested the U.S. economy was humming along at a stronger-than-expected pace last week. Bitcoin’s price started at $102,000—only to dip below $93,000 after Friday’s blowout jobs reading.
The Bitcoin price immediately jumped following Wednesday’s inflation snapshot, increasing 1.9% and briefly surpassing $99,000 in around 30 minutes. In addition, Ethereum and Solana prices were also lifted by the new inflation statistics, reaching $3,300 each and $192 for Solana.
Bitcoin is still holding onto some of the gains it made after last month’s election, however inflation concerns have eroded them.
Consumer prices increased 0.4% on a monthly basis in December. This was slightly higher than the inflation rate from the month before. In the months prior to December, inflation had been 0.2% per month.
Although the U.S. inflation rate has dropped from its four-decade peak of 9.1% to a more modest 2.5% in 2022 it remains higher than the Fed target. Fed policymakers signaled that despite easing the financial environment last year, their mission to control rising prices might not yet be complete.
Fed minutes published last week revealed that policymakers believed potential changes in immigration and trading policies under Donald Trump’s presidency could pose upside risks for inflation. The Fed took this into account when it announced last month that rates would be cut by only two 25-basis point cuts in 2018. This is down from the four reductions that were originally projected.
Some analysts think that Fed’s ease campaign is already over, given the recent strength of the U.S. Economy. CME FedWatch reports that according to traders, there is a 53% probability Wednesday the Fed will cut interest rates only once by 2025 or never. This was down significantly from Tuesday’s 70%.
Pandl noted that the core CPI report released on Wednesday was at 3,2%. That’s below what economists expected of 3,3%. The economists believe that core inflation (which excludes volatile energy and food prices) is more indicative of the underlying trend.
"Before this report, the market was only pricing in one rate cut this year," “He said” "The idea that we could have Fed rate hikes this year is not in sight after this report."
Low interest rates are generally supportive to risky assets such as stocks and cryptocurrency. Through lower borrowing rates and increased spending, they can also contribute to inflation.
After the Fed’s next meeting, which is scheduled to take place later in this month, Core PCE, or the Fed’s preferred gauge of inflation, will be announced. The traders believe that despite signs of economic growth, the central bank is likely to maintain its rates.
Stacy Elliott edited this article.