Slowing Inflation Growth Points to More Upside in Crypto

This week provides another crucial hint regarding economic expansion for our central bank’s decision-makers. On Wednesday morning, the U.S. Bureau of Labor Statistics (BLS) disclosed the Consumer Price Index (CPI) figures for August.

The significance of this number lies in its role as one of the final crucial indicators of economic expansion that the Federal Reserve reviews before their monetary policy meeting on September 17-18. Following a subpar Beige Book survey and underwhelming employment growth figures from last week, the Consumer Price Index reading is now due. If inflation growth turns out to be moderate, it might persuade our central bank to adopt a more accommodating (leaning towards reducing interest rates) approach.

This morning, the annual inflation growth for August was reported at 2.5%, a decrease from the 2.9% in July. This is the lowest figure since March 2021’s 2.6% rise. Essentially, this means that the Federal Reserve is getting closer to its target of 2%. This development could lead to reduced interest rates in the future, bolstering sustained economic growth and potentially boosting Bitcoin and Ethereum’s long-term value.

But don’t take my word for it, let’s look at what the data’s telling us…

Monthly, Federal Reserve Banks in Dallas, Kansas City, New York, and Philadelphia engage with local manufacturers to assess their business activities. They inquire about factors such as new orders, workload, stock levels, delivery durations, and employment status. Respondents indicate whether their business is expanding, contracting, or remaining stable. This information is later combined into a unified index.

The results are important because the districts those central banks cover make up roughly 25% of national economic output. So, by gauging what’s going on there, we can get a sense of what’s happening across the country.

The “prices received” figure is the one we find most significant as it reflects what consumers are actually paying manufacturers for their completed products. In other words, it’s similar to the Consumer Price Index (CPI). Remarkably, these figures become available before the Bureau of Labor Statistics releases its monthly index.

By examining regional production figures ahead of time, we can make some educated guesses about upcoming inflation trends. From my observations, it seems that prices have relaxed a bit in August…

In the provided chart, you’ll find that my unique inflation indicator (“CPRI”) started declining in October 2021, around eight months before the CPI did. Since then, on the graph’s right side, the CPRI has remained fairly steady slightly above neutral since last July’s month. This shift seems to have caused the CPI to trend downwards gradually.

However, it’s not only the stagnation in price changes alone that convinces me inflation is decelerating. Here’s a graph showing gas prices…

Based on data from the U.S. Energy Information Administration (EIA), the average cost of gasoline per gallon decreased from $3.60 in July to $3.51 in August, marking a nearly 3% drop. However, it’s worth noting that we are currently paying about 11% less at the pump compared to August 2022, with gasoline costing around $3.95 a year ago.

Now look at how closely inflation follows retail gas prices…

Approximately 4% of the total Consumer Price Index (CPI) is attributed to gas prices. This percentage serves as an indicator of overall economic activity due to its frequent usage in everyday life. Essentially, when demand for gas is high, prices tend to rise, whereas reduced demand typically leads to lower prices.

1) In comparison to the 3% decrease in gas prices observed in July, the decrease in August is expected to be even more significant. Notably, when the July Consumer Price Index (CPI) data was revealed, inflation growth dipped below 3% for the first time since 2021. This suggests that gas prices will have a greater impact on overall inflation figures when the August CPI results are published.

Currently, while the Fed’s favored indicator of inflation is core personal consumption expenditures (which will be released later this month), Consumer Price Index (CPI) continues to influence investor sentiment in the stock market. As expected, today’s CPI reading was 2.5%. This result strengthens the argument for our central bank reducing interest rates, potentially by up to 0.5 percentage points.

The shift is expected to lower the worth of our currency, which in turn increases the cost of financial products linked to the US dollar. However, this situation could bolster a sustained, long-term surge in the value of digital assets such as Bitcoin and Ethereum that are crypto-based investments.

Please be aware that the opinions shared within this article belong solely to the writer and may not align with the perspectives of CoinDesk Inc., its proprietors, or its associates.