Inflation slowed in October but still came in hot at 3.2%. At the November FOMC meeting, Fed Chair Jerome Powell said the central bank’s fight against inflation is far from over.
Meanwhile, the U.S. Department of Labor’s Consumer Price Index print for November rose 3.2% for the trailing 12-month period when seasonally adjusted.
Not seasonally adjusted, the CPI carried over from October unchanged.
The slight cooldown in consumer prices could give Bitcoin a lift after a week that’s seeing a slowdown in corporate and large investor demand.
Cooling inflation could bolster Bitcoin in the short term because some market participants may be willing to go more risk-on.
But in the long run, the faster the U.S. dollar supply grows, the more dollars Bitcoin’s limited supply can command at an exchange. That’s one of the features built into the deflationary blockchain currency by design.
Since its inception, Bitcoin has been a strong hedge for central bank currency inflation. A Jefferies analyst recently noted that Bitcoin is a “critical hedge” against currency debasement.
So, for close watchers of Bitcoin’s price on crypto exchange markets, the rate of U.S. dollar inflation is critical to keep in view.
Fed watchers are expecting the central bank to pivot hard next year from the current hawkish interest rate regime. Lower interest rates would help soften the landing for GDP, which appears headed for a recession next year.
As a result, the Fed may switch by next May from a wait-and-see approach to cutting interest rates. Analysts for UBS Investment Bank recently wrote:
“We expect substantially slower growth in 2024, a rising unemployment rate, and meaningful reductions in the federal funds rate.”
UBS expects the Fed to shift to “full-on accommodation mode” with a 2.75% slash in rates. That will unleash U.S. dollar money supplies and likely drive headline inflation higher next year just as new Bitcoin supply is cut at the next halving.
In the meantime, investors are exercising some caution as Bitcoin enters a higher volatility environment.