What happened
Cryptocurrencies and equities fell today after new inflation data showed that consumer prices stayed hotter than expected in August, much to the dismay of investors. The Dow Jones Industrial Average has given up roughly 719 points as of this writing.
As of 10:24 a.m. ET, the world’s largest cryptocurrency, Bitcoin (BTC -4.76%), has traded 5.6% lower over the past 24 hours, at around $21,330. The world’s second-largest cryptocurrency, Ethereum (ETH -7.47%), is trading roughly 8.8% lower, and the price of the meme token Shiba Inu (SHIB -5.52%) has fallen roughly 7%.
So what
Earlier this morning, the U.S. Bureau of Labor Statistics (BLS) reported the latest August data for the Consumer Price Index (CPI), which tracks the prices on a basket of common consumer goods and services. The CPI is one means investors use to measure inflation.
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In August, the CPI rose 0.1% from July and came in 8.3% higher than in August of 2021. That’s something of an improvement from July, when the CPI came in 8.5% higher year over year, but the CPI was unchanged between June and July.
Additionally, the CPI came in higher than economists had been projecting. This all but solidifies that the Federal Reserve will raise its benchmark overnight lending rate, the federal funds rate, by another 0.75% at its meeting later this month. U.S. Treasury yields surged higher as a result of the CPI report.
In the CPI, energy prices fell another 5% in August, led by a 10.6% decline in gasoline prices. But shelter prices continued to rise fast, as did medical care services, new vehicle prices, and food away from home.
Matt Peron, director of research at Janus Henderson Investors, said the CPI report “pushes back any ‘Fed pivot’ that the markets were hopeful for in the near term. As we have cautioned over the past months, we are not out of the woods yet and would maintain a defensive posture with equity and sector allocations.”
High inflation, which has driven aggressive interest rate hikes at the Fed, has hammered markets this year. After a better-than-expected CPI report in July, many had hoped that inflation had peaked and was headed south. While I wouldn’t say this report completely dispels that notion, it does suggest that it could take longer than expected to bring down inflation.
Rising interest rates have been particularly painful for the crypto market, which went on a huge run in 2021. When rates rise, so do the yields on safer assets like U.S. Treasury bills. This makes investing in riskier assets like crypto less favorable. Cryptocurrencies are also difficult to value and very volatile, so the longer the Fed has to raise rates the more difficult it will be for the crypto market to bounce back.
Now what
I was certainly expecting to see a better CPI report today, given the decrease in a lot of consumer and energy prices seen in August. But at least inflation seems to be headed in a somewhat decent direction, even if it’s not moving as fast as the market would like.
Rent remains stubbornly high, which can be a problem for inflation and cause it to linger because it can be a big expense for consumers and take up a big chunk of their income.
Ultimately, I still like Bitcoin and Ethereum for the long term, especially with Ethereum about to undergo the “Merge,” which should drastically improve the network. I am still avoiding Shiba Inu, at least until there are more substantial upgrades to its protocol.
Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
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