CPI Comes In On Target

Inflation came in slightly cooler than expected, in a mildly bullish sign for crypto.

CPI Comes In On Target

Today's all-important CPI figures are out, with inflation just beating market expectations, in a welcome sign for crypto.

Inflation has been running high since March 2021, despite Fed predictions it would be "transitory" (it turns out high inflation can be transitory for a really long time).

CPI chart from CNBC
Inflation has been above the Fed's 2% target for nearly two-and-a-half years.

Ten successive interest rate hikes have helped to wrest inflation back under control, though the effects of dampening demand have not yet been fully experienced; there is typically a 9-to-12-month lag before the impact of rate rises on the economy are properly felt.

The latest CPI print is a particularly important one, because the Fed is at or near the end of its hiking cycle. If inflation is now under control, there would be no reason for more rate increases; conversely, a higher-than-expected print would make future hikes more likely.

Interest rates, of course, hold enormous influence over the markets. By determining how much investors can earn simply by holding cash, and impacting the cost of borrowing, interest rates contribute to the wider risk-on vs risk-off sentiment. A confirmed end to interest rate rises makes investing in riskier assets like stocks and crypto more attractive.

Expectation Vs Reality

What is important is not simply the actual CPI rate, but how the data compares to the market's expectations. If inflation is lower than expected, then the market will reprice accordingly, as traders use the new information to adjust their positions.

CPI was forecast to drop to 4.1%, and 5.3% for core inflation (which strips out more volatile food and energy components). While that's still high, and double the Fed's 2% target, it's well below the peak of over 9% seen a year ago, and heading in the right direction.

Screenshot from https://www.bls.gov/cpi/latest-numbers.htm
Inflation came in just below expecations.

In the event, inflation came in at 4%, and core inflation at 5.3%, almost exactly as expected. The prior month's figures were 4.9% and 5.5% respectively.

Early on Tuesday, before the CPI data was released, the market's expectation was strongly in favor of interest rates being held at 500-525 bps (76%), with a 24% chance of a hike to 525-500 bps. Following publication of the CPI data, that changed to 79/21%, a small but significant improvement.

Bitcoin always sees volatility around the CPI print, and immediately following publication of the data BTC rose above $26,400, before dropping back slightly.

Overall, this was a mildly bullish development for the crypto markets, which are waiting on tenterhooks for a series of key events this week.

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