Inflation in the United States was higher than expected in January, raising concerns about the Federal Reserve's (Fed) monetary policy and affecting the cryptocurrency market. The consumer price index (CPI) rose 0.3% in January compared to December, exceeding the median projection of 0.2%. In the annual comparison, the CPI increased 3.1%, slowing down from 3.4% in December, but remaining above the expected 2.9%.
The core CPI, which excludes volatile food and energy prices, was also above estimates, with an increase of 0.4% in the monthly comparison and 3.9% in the annual comparison, repeating the December variation. The data shows that inflation in the US remains resilient, even with the coronavirus pandemic and the fiscal and monetary stimulus measures adopted by the government and the Fed.
Higher inflation in the US reduces the chances of an interest rate cut by the Fed, which has kept the base rate between 5.25% and 5.50% per year since mid-2023. The Fed has said it needs more evidence of that inflation is under control before starting a cycle of monetary easing. However, some analysts believe the Fed may be forced to act sooner if inflation continues to surprise on the upside.
The inflation scenario in the US has a direct impact on the cryptocurrency market, which is considered by many investors as a form of protection against the loss of purchasing power of fiat currencies. Cryptocurrencies, especially Bitcoin ($BTC ), have a deflationary nature, as they have a limited supply and cannot be issued arbitrarily by governments.
However, cryptocurrencies are also sensitive to expectations about interest rates in the US, as a higher rate makes the dollar more attractive and reduces demand for alternative assets. Additionally, a higher rate increases the opportunity cost of investing in cryptocurrencies, which do not pay interest or dividends.
In this sense, higher inflation in the US in January caused a drop in the main cryptocurrencies, which were already coming from a negative performance in 2023. Bitcoin, the largest and most popular cryptocurrency, fell 5% this Tuesday, February 13, and accumulates a loss of 15% for the year. Other cryptocurrencies, such as Ethereum ($ETH ), Ripple and Litecoin, also recorded significant drops.
We expect US inflation to stabilize in the coming months, allowing the Fed to maintain its accommodative stance and cryptocurrencies to regain their luster as a store of value. However, the risk of persistent inflation and a change in the Fed's monetary policy remains on the radar, potentially bringing more volatility and uncertainty to the cryptocurrency market.
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