Cryptocurrency markets experienced an upswing on Wednesday following the release of a key U.S. inflation report suggesting that the Federal Reserve’s efforts to combat rising prices are having a positive effect. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) increased by 4.9% over the 12 months ending in April. This figure is slightly below economists’ expectations of a 5% rise.
Compounded by recent monthly growth, these inflation figures seem to be giving cryptocurrency markets a boost. Bitcoin climbed 1.4% over the past day, partially offsetting its 1.8% weekly loss with a price around $27,900. Ethereum similarly saw a 1.6% daily gain, reversing its weekly downtrend and reaching $1,870. The global crypto market cap edged up 0.8% from the previous day, totaling $1.2 trillion.
Contributing to the April CPI increase, housing prices rose 0.4% on a monthly basis. Although this growth is noteworthy, it represents a decline compared to the 0.6% monthly growth in March and the 0.8% rise in February. The report also showed that core inflation, which removes volatile food and energy prices from the equation, reached 5.5% in the year ending in April, slightly down from its 5.6% mark in March.
Overall, inflation has gradually slowed since peaking in June at 9.1%. However, the current 4.9% annual rate still exceeds the Fed’s 2% target. To counteract these above-target figures, the central bank has raised interest rates to levels not seen since 2007, marking ten consecutive rate hikes.
This aggressive approach has a cooling effect on the economy, impacting credit card and mortgage costs as well as “risk” assets like stocks and cryptocurrencies. As a result, cash reserves and U.S. Treasury Bills become more appealing.
The main issue with raising interest rates too quickly is the potential to cause a recession. This danger has started to manifest with several banks collapsing in March, followed by First Republic Bank’s recent failure. The looming debt ceiling crisis further adds to the concerns.
Upon last week’s interest rate increase, Federal Reserve Chair Jerome Powell hinted at a possible pause. However, he noted that any decision would be based on the economy’s performance ahead of the Fed’s upcoming meeting in June.
For crypto enthusiasts and market participants, keeping a close eye on the Fed’s actions and the relationship between inflation and cryptocurrency markets will be essential in upcoming months. While certain indicators suggest a cooling economy, unexpected changes could drastically affect the cryptocurrency landscape.
Source: Decrypt
