Bitcoin Edges Higher as Inflation Cools More Than Expected in March

Fresh off its climb past $30,000 the day before, Bitcoin inched higher after a widely-watched inflation gauge showed rising prices continued to cool in March.

The Consumer Price Index rose 5% in the 12 months through March, the Bureau of Labor Statistics (BLS) said Wednesday, coming in lower than economists’ forecasts. On a monthly basis, the index rose 0.1%, a notable deceleration from 0.4% in February.

Bitcoin rose .6% to $30,276 while Ethereum was down 1.5% to $1,887 ahead of the network’s Shanghai upgrade, according to CoinGecko.

Other tokens, including Dogecoin and XRP were also in the red, as the market cap of all cryptocurrencies totaled $1.28 trillion.

The CPI, which tracks price movements across a broad range of goods and services, provides potential insight into the Federal Reserve’s next move. The U.S. central bank has jacked interest rates aggressively in an attempt to tame sky-high inflation, which reached a 41-year high of 9.1% last June but has recently taken a softer approach with smaller rate hikes.

“It’s a signal that tells us the Fed will likely start to think about pivoting,” William O'Neil + Co’s Head of Research Product Dean Kim told Decrypt, referencing the CPI print. “They've done enough damage in 2022, raising rates by a lot, and we've seen some systemic fallout from that.”

Unpacking the CPI

A decrease in energy prices was cited by the BLS as a major factor in the index’s slowdown on an annual basis, falling 3.5% on a month-to-month basis. Core CPI, which strips out volatile food and energy prices, rose 5.6% in the twelve months through March. The measure used to hone in on inflation trends posted a monthly gain of 0.4%, a slight decrease compared to 0.5% in February.

Shelter costs rose 8.2% in the 12 months through March while increasing 0.6% on a monthly basis. Economists have been watching shelter prices closely, which account for a significant portion of both core CPI and headline inflation, and have proven stubborn. 

“If you strip out shelter, inflation is actually quite low,” said Kim. “But the fact that the overall number is coming in cooler, that's a sign that the shelter component is also easing.”

When the Fed tries to slow down an overheated economy by increasing borrowing costs, it will generally keep its foot on the brake until fractures form in some part of the financial system—at least that’s how the Wall Street adage goes.

Anticipation has grown among investors that the Fed could soon put its tightening spree on pause—or even reverse course by cutting rates—following the collapse of several banks last month, such as the crypto-friendly firms Silvergate Bank and Signature Bank.

But the Fed decided to push rates higher anyway, delivering a modest rate hike of a quarter of a percent in March. It raised rates to a range of between 4.75% and 5.00%, and Fed Chairman Jerome Powell signaled ongoing increases would likely be needed to knock inflation down to 2%—the Fed’s goal for maintaining stable prices.

However, markets aren't convinced. Investors are betting the U.S. central bank will deliver one more rate hike in May and eventually cut them by the end of this year, according to the CME FedWatch Tool.

The probability of the Fed delivering a 25 basis point rate hike ticked down slightly after Wednesday’s CPI print to around 67% from nearly 73% the day before.

Crypto reacts to high-rate environment

Cryptocurrency prices, while already falling, came under even more pressure when the Fed lifted interest rates from near zero last March. Tight money has weighed down on other risk assets like stocks, making them less attractive compared to U.S. Treasuries or holding cash reserves.

Price movements on the back of the latest CPI print were likely amplified by the recent closures of Silvergate’s SEN and Signature’s Signet network. The loss of the payment networks once used extensively by institutions has posed liquidity risks to markets and injected volatility.

"At the same time, the impact that monthly inflation readings have on cryptocurrency markets has been waning as the Fed’s path forward to subduing inflation becomes more evident," Bit Mining Limited's chief economist Youwei Yang told Decrypt.

While cryptocurrencies largely tumbled throughout 2022, blue-chip digital assets have emerged as one of the best-performing investments so far this year. Bitcoin and Ethereum are up over 81% and 56% year to date, respectively, according to CoinGecko.

“Basically, they’ve priced it in, and the impact [of CPI] has been decaying for a bit,” said Yang. “Markets have a more clear picture—almost every market participant was expecting 5.1% or 5.2% inflation, and CPI came out a little bit better than expected."

The latest pullback from all-time highs was far more dramatic for crypto than stocks, yet the coins’ gains outpace major indexes like the S&P 500 and Nasdaq, which have risen 7.5% and roughly 16%, respectively, so far this year.