Perceived store-of-value assets like bitcoin and gold are rising as investors reassess the stickiness of inflation in the wake of a hotter-than-expected October reading in the U.S. consumer price index (CPI).
The price of bitcoin (BTC) has increased by nearly $3,000, hitting a new record high of $68,950, since the Labor Department’s CPI report was released at 13:30 UTC (8:30 a.m. ET).
“It is eye-opening to see the price react so spectacularly in this way,” Simon Peters, cryptoasset analyst at the trading platform eToro, said in an email.
The report showed that the cost of living in the U.S. rose 6.2% in October from a year earlier, the fastest since 1990. Core inflation, which strips out the volatile food and energy component, rose 4.6%, the highest pace since August 1991.
The new data could provide a fresh test for Federal Reserve Chair Jerome Powell’s characterization of the inflation threat as “transitory” – the idea that upward price pressure will subside once the global economy has fully reopened from coronavirus-related restrictions and supply-chain bottlenecks and other issues are temporary.
The inflation increase was “broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks and new vehicles among the larger contributors,” the Labor Department’s Bureau of Labor Statistics said in its statement.
Bitcoin is now trading 2.7% higher on the day. Based on a price-chart analysis, a descending trendline breakout seen on the hourly chart has exposed the psychological resistance at $70,000.
— Kathy Jones (@KathyJones) November 10, 2021
Bitcoin rallied 40% in October. The popular narrative was that the launch of a bitcoin futures-based exchange-traded fund (ETF) would bring in mainstream money, pushing up demand for the cryptocurrency and thus the price.
But analysts at JPMorgan attributed the rally to rising inflation expectations and bitcoin’s appeal as a hedge against rising prices.
Many cryptocurrency investors see the digital asset as a bulwark against central bank money printing, due to limits on bitcoin’s supply that are hard-coded into the underlying blockchain network’s programming.
Bitcoin’s price reaction to the CPI report is not only a “signal that the market is extremely averse to inflationary pressure, it is a sign investors are now firmly using bitcoin as a hedge against rising prices,” eToro’s Peters said. “It is also a sign that institutional investors may be participating in ‘buying the news,’ as this is the sort of movement we’d typically associate with other markets that react heavily to economic news.”
The trend looks set to continue, with equity markets showing few signs of stress. Futures contracts tied to the S&P 500 index of large U.S. stocks were down a meager 0.2% at press time.
Gold, a traditional inflation hedge, has broken above a long-held resistance at $1,830 to trade at a five-month high of $1,853.
The U.S. five-year “breakeven rate” – a gauge of inflation expectations over the next five years derived from bond-market indicators – has jumped above 3%, the highest since at least 2001, according to Bloomberg.
What will the Fed do?
Traders in the market for futures contracts on the Federal Reserve’s key interest rate now see a 38% chance of a rate hike in June 2022, up from 28% prior to the CPI report.
Meanwhile, the two-year U.S. Treasury yield, which is more sensitive to rate hike expectations than the 10-year yield, has jumped eight basis points to 0.5%.
Should markets price in faster and earlier rate hikes, bitcoin’s momentum may slow.
St. Louis Federal Reserve President James Bullard told CNBC on Tuesday that the U.S. central bank may hike its benchmark rate twice in 2022, after winding down its $120 billion-a-month bond-buying program.
BREAKING: Inflation is up 6.2% year-over-year.
That's the highest increase in 31 years.
Economists & politicians claimed inflation was non-existent, transitory, and even that it was good for you.
Meanwhile, your purchasing power was being reduced at a historic rate — wake up.
— Joe Pompliano (@JoePompliano) November 10, 2021