Inflation accelerated again in May after slowing down in April, which could have a negative impact on cryptocurrency markets already reeling from the Federal Reserve’s tighter monetary policy.
The Consumer Price Index (CPI) rose 8.6% in the 12 months through May, which is the largest 12-month increase since December of 1981, the Bureau of Labor Statistics (BLS) reported Friday.
The largest monthly gains for CPI, an index that tracks price movements across a broad range of goods and services, came from shelter, food, and gasoline. After dipping in April, the energy index climbed 3.9% on a month-to-month basis. The index for electricity increased by 1.3% in May, indicating the price of electricity has increased by 12% within the past year—which will raise the cost of cryptocurrency mining.
“The higher cost of energy is going to make mining a more expensive, less profitable business,” said Jason Schenker, chief economist at Prestige Economics. “As for crypto in general, if you see people going into more defensive assets, that’s not something I think would favor crypto as well.”
If the Fed grows more aggressive in raising interest rates, that could further coax institutional investors out of the cryptocurrency market as they seek less volatile investments in treasuries and bonds. A selloff would be bad for the prices of most digital assets.
Crypto market slips
Today, the broader crypto market took a hit around the same time as the BLS report’s release. Bitcoin is down by 4.2% and Ethereum is down by over 7% over the past 24 hours, according to CoinMarketCap.
Other cryptocurrencies were hit harder, including Solana (down 9%), Avalanche (down 10%), and Cardano, which has dropped by over 11% in the course of the past day.
“We have already seen institutional investing slow down and the trend is likely to continue,” said Lucas Outumuro, head of research at IntoTheBlock, a data science company specializing in crypto markets. “Bitcoin has not been an effective inflation hedge thus far as many thought, which was one of the key narratives pushing it forward last year. However, today’s price action shows Bitcoin dropping less than the Nasdaq and S&P, so if this trend continues then institutions may reassess their stance.”
Inflation is forcing households to be more conscientious about how they spend their money, and it especially impacts those with less income that spend more of their budget on necessities, such as food and rent. Tighter budgets might have a dampening effect on the demand for digital assets.
The Fed is walking a tightrope as they raise interest rates, making it more expensive to borrow in an attempt to cool down consumer spending and the economy. If they raise interest rates too aggressively it could tip the economy into a recession, and the latest report gives them less room to breathe.
Higher interest rates also make it more costly for most businesses to expand, having a pronounced impact on the growth of tech companies. The price of Bitcoin has become increasingly correlated with tech stocks traded on Wall Street, according to a report published in April by Arcane Research. That pattern has continued through June, according to data from blockchain analytics firm Chainalysis.
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