US inflation hit 7 percent on January 12. That is the largest increase in 40 years. The question now is how the crypto market will respond to this.


Increasing pressure on the global economy

The daily cost of living in America is increasing every day. For example, used car prices have increased by almost 37% and average rental costs have increased by almost 10%. Other daily necessities such as food and fuel are also experiencing a sharp rise in prices.

In October last year, US inflation was 6.8%, which was already putting enormous pressure on the global economy. However, at 7%, the US economy is entering a very scary zone as politicians struggle to manage the consumer price index (CPI).

US President Joe Bidon himself admitted that “there is more work to be done”. The political pressure on the Democratic leader is therefore increasing strongly. The US has been struggling with enormous turbulence on the stock markets since the beginning of this year.

US 1 year CPI data. Source: tradingeconomics.com

CPI data shows that consumer prices have increased by as much as 0.5% since December. This is the highest monthly increase since the start of the pandemic.

However, inflation is not limited to the US market. In the UK, consumer prices are up 5.1%, a 10-year record. The Bank of England predicts that rising energy prices could push inflation in the country by more than 6%.


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Effect on the crypto market

The crypto market experienced a brief rally as inflation data was released. This is because traders normally buy riskier assets when inflation rises. As a result, there was a subtle spike in Bitcoin and the leading altcoins. The global crypto market capitalization is up 3.4% in 24 hours.

However, it is not necessarily a good thing for crypto. The market is still very bearish. Rising inflation could force the Federal Reserves to aggressively raise interest rates and shrink its balance sheet. When that happens, government bond yields will rise and all risky assets, including crypto, will be bearish.

Just a few months ago, many financial experts and investors praised Bitcoin. They claimed it will replace gold as an inflation hedge in the future. However, the volatility suggests that there is still a long way to go.

The current market does not trade crypto as a hedge against inflation. Rather, it is seen as an effective alternative to equities due to its low interest rates.

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