Bitcoin Traders Should Watch Wider Inflation Metrics, Not Just CPI

• Thursday's U.S. CPI release is important, but so are wider inflation metrics that point to a rebound in price pressures.
• The possibility of a pickup in inflation means the Fed is likely to stay hawkish for some time. That could bring downside volatility in risky assets, including cryptocurrencies.

As crypto and traditional market traders await the U.S. Consumer Price Index for July, some observers are focused on forward-looking metrics that suggest the potential for a rebound in inflation in months ahead, a scenario that could bring some pain to risky assets.

On Thursday at 12:30 UTC (8:30 ET), the U.S. Labor Department will release the July Consumer Price Index. Economists surveyed by the Wall Street Journal estimate that the CPI rose 0.2% month-on-month in July, matching June's pace to signal a continued easing of inflation. The annualized rate is forecasted to have inched higher to 3.3%, predominantly due to base effects, according to the Journal. The core inflation rate, which excludes food and energy prices, is also forecast to have held steady at 0.2% in July from June and to have risen by 4.8% from a year earlier.

A monthly gain of 0.2% would be consistent with the moderation of inflation that Federal Reserve officials want to see, more so given its policy is now sufficiently restrictive at 5.25%, which means the borrowing cost is above CPI, core CPI and the bank's preferred inflation measure, the core personal consumption expenditures, or PCE.

So, traders may feel encouraged to scale up exposure to risky assets, including bitcoin (BTC), should the data match estimates, validating t dovish expectations in the market. Fed-funds futures show traders believe the Fed's rate hike cycle peaked in July and the central bank will cut rates next year.

Traders, however, are likely wrong in pricing rate cuts as forward-looking metrics point to stagflation ahead, Noelle Acheson, author of the Crypto is Macro Now newsletter, explained during CoinDesk's Twitter spaces event on Wednesday. The CPI data is backward-looking and exposed to base effects, which tend to hide the true picture.

While discussing the pending CPI release, Acheson noted that U.S. gasoline prices have surged to their highest level since October 2022 and cited an increase in the FOA Food Price Index. She also pointed to the need to replenish the dwindling U.S. petroleum reserves and its bullish impact on oil prices. The CPI is sensitive to changes in oil prices.

Acheson added that the Cleveland Fed nowcast has headline CPI for July at 0.41%, more than double the consensus forecast of 0.2%. The model suggests an uptick in the inflation rate to 0.6% in August. That would amount to an annualized CPI rate of 7.4%.

"Stagflation is the worst possible scenario for risk assets, particularly for stocks," Acheson said, adding that compared to the situation with equities, the downside in bitcoin appears to be limited, considering current low participation from macro investors, the possibility that the U.S. Securities and Exchange Commission will approve a spot bitcoin exchange-traded fund and bitcoin's gold-like appeal.

In a note to clients on Wednesday, analysts at ING said the latest uptick in bond market's expectations for price pressures suggests the Fed's inflation fight is not over yet and warned of continued elevated bond yields. Bitcoin has had an inverse relationship with U.S. bond yields.

The U.S. 5-year, 5-year forward inflation expectations rate jumped to a 16-month high of 2.53% early this week, according to the St. Louis Federal Reserve.

"These are not awful levels when you consider where inflation was, and at least these expectations are still comfortably below 3%. But it’s the path they’ve been on that creates the issue, as that path has been pointing upwards. At the same time, there is an ongoing rise in food and energy prices in play, which risks adding to headline pressure down the line," the ING analysts wrote.

"Given this backdrop, the U.S. 10yr has managed to remain above 4%, and we think it should continue to do so. And remember, once we get through tomorrow’s U.S. inflation report, we’ll likely see headline U.S. inflation closer to 3.5% than 3% and core U.S. inflation closer to 5% than 4%," the analysts added.