Bitcoin Reaches $98,000 Amid Rise in Inflation to 2.9% in December

In December, consumer prices increased as projected, signaling a possible boost for risk assets that have struggled amid recent changes in the outlook for Federal Reserve rate cuts. According to the Bureau of Labor Statistics, the Consumer Price Index (CPI), which measures price alterations for a variety of goods and services, rose by 2.9% over the year ending in December.

"Markets were beginning to doubt the disinflation narrative and the potential for Fed rate cuts," said Zach Pandl, Head of Research at Grayscale, speaking to Decrypt. "I believe this report reopens the discussion on Fed rate cuts." This inflation data was much awaited after reports showed a stronger-than-expected performance in the U.S. economy last week.

Bitcoin's price opened at about $102,000 but dropped below $93,000 following last Friday's robust jobs report. However, in response to the inflation update released Wednesday, Bitcoin's price surged 1.5% and hit approximately $98,500 within 15 minutes. Other cryptocurrencies like Ethereum and Solana also saw increases, reaching about $3,300 and $192, respectively, thanks to the new inflation data.

While Bitcoin has maintained a large portion of its gains since the elections, inflation concerns have suppressed its value from the peak of $108,000 it reached last month. On a monthly scale, consumer prices rose by 0.4% in December, slightly exceeding the inflation rate from the previous month, which was recorded at 0.2% between July and October.

Inflation in the U.S. has significantly decreased from a 40-year high of 9.1% in 2022 but still exceeds the Federal Reserve's target of 2%. Fed officials have suggested that their efforts to manage rising prices may not yet be finished despite some easing in financial conditions last year.

Last week's Fed minutes hinted that potential policy changes regarding trade and immigration under President-elect Donald Trump could add upward pressure on inflation. Consequently, the Fed indicated last month it might lower rates by 25 basis points two times this year, a decrease from the previously projected four rate cuts.

Due to the robustness of the recent U.S. economy, some analysts believe the Fed's easing strategy may have reached its conclusion. Traders noted a 53% chance Wednesday that the Fed would implement a rate cut once in 2025 or potentially avoid cuts altogether, significantly down from the previous estimate of 70% on Tuesday.

Pandl remarked that Wednesday's inflation report showcased the lowest core CPI reading in a few months at 3.2%, coming in lower than the predicted 3.3%. Core inflation, which excludes volatile food and energy prices, is often regarded as a more reliable indicator of long-term trends.

"Before this report emerged, the markets were anticipating just one rate cut this year," he stated. "Following this report, the possibility of Fed rate hikes this year is not in sight." Lower interest rates typically support risk assets like stocks and cryptocurrencies as they can stimulate inflation through more accessible borrowing and increased consumer spending.

The core Personal Consumption Expenditures (PCE) index, which is favored by the Fed for measuring inflation, will be released after the next central bank meeting this month. With signs pointing toward economic strength, market participants nearly expect that the central bank will maintain its rates at the current level.

Bitcoin, Inflation, Economy