Consumer prices fell slightly in December, with bitcoin and other cryptocurrencies holding their ground in hopes of smaller interest rate hikes from the Federal Reserve.
The Bureau of Labor and Statistics reported on Thursday that its Consumer Price Index (CPI) rose 6.5% in the 12 months to December, a drop from 7.1% in November. Analysts had expected the index, which tracks price movements across a wide range of goods and services, to show inflation slowed to 6.5% year-on-year.
Bitcoin Posted Notable earnings before the release of the report and after, rising 5% of a day before $18,275according to data from CoinGecko.
Ethereum pink 5% also for $1,401 and other altcoins such as Cardano and polka dotsrose to over 3.8%.
“The market seems to be reading this as dovish, for the most part,” said CoinShares head of research James Butterfill. decrypt. “From a cryptographic point of view, this is likely to be favorable as well”
Major stock indices also reacted favorably to the report, a worrying sign of similarity between crypto and traditional markets, said Laguna Labs chief executive Stefan Rust.
“It is a worrying trend to see Bitcoin moving in sync with traditional financial indicators and equity markets,” he said. “As we know, Bitcoin was founded to be an alternative financial system to Wall Street, and it looks like we may be losing our way.”
The pace of month-on-month inflation showed prices fell by 0.1% in December, after increases of 0.1% in November and 0.4% in October. the decrease was partially attributed to a month-over-month decline in the price of gasoline and fuel oilthat dropped 9.4% and 16.6%, respectively.
The Core CPI, a measure of inflation that excludes volatile food and energy prices, rose slightly by 0.3% in December to 5.7% year-on-year, in line with analysts’ expectations.
The annual inflation rate has fallen steadily since peaking at 9.1% in June last year, which was the highest 12-month rate in 40 years. However, inflation remains well above the Fed’s target of 2% a year.
To control rising prices, the Fed raised its benchmark interest rate seven times last year, from nearly zero to somewhere between 4.25% and 4.5%. By raising interest rates, the Fed makes borrowing more expensive for businesses and consumers, cooling the economy.
As interest rates rise, investors are often fleeing riskier assets like stocks and cryptocurrencies in exchange for the guaranteed returns offered by more conservative assets like US Treasuries, with so-called risk-free returns because of the government support.
After raising interest rates by 75 basis points for four consecutive policy meetings, the US central bank showed signs of easing gas in December when it raised rates by 50 basis points.
February rates rise expected
Thursday’s inflation report will likely factor into the central bank’s next policy meeting in February, where the Fed is expected to raise rates again. But the Fed also takes into account other economic factors, such as the strength of the US labor market, when making decisions.
The Fed has essentially walked a tightrope as it intends to fight a decades-long bout of inflation. By acting too timidly, inflation can become entrenched in the financial system, but if the Fed raises rates too aggressively, it could tip the economy into a recession.
However, analysts are more convinced that the Fed will continue its softer approach to rate hikes after Thursday’s CPI report. The chance that the Fed will raise rates by a quarter of a percentage point compared to half a percentage point increased slightly to 94% of 76% the day before, according to the CME FedWatch Tool.
“I think they are likely to go up 50 basis points and stay on course for now,” argued CoinShares’ Butterfull. “Keep in mind that what the Fed should be doing and what they will be doing are different things.”
At an event hosted by Sweden’s central bank, Sveriges Riksbank, Fed Chairman Jerome Powell acknowledged that rate hikes are painful but said they are critical to maintaining the long-term health of the economy, according to CNN Business.
“Price stability is the foundation of a healthy economy and offers the public immeasurable benefits over time,” he said. “But restoring price stability when inflation is high may require measures that are not popular in the short term.”
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