Inflation has hit its highest level in 13 years, according to new Consumer Price Index data released today. Year-over-year inflation hit a whopping 5.4%, well above the 2% long-term rate target the U.S. Federal Reserve sees as economically healthy.
Some bitcoin investors may take that as a buy signal: Bitcoiners have long argued the digital currency has the potential to act as a hedge against inflation in any single currency. That argument often hinges on bitcoin’s strictly limited supply, but just as important is its global nature, disconnected from any one country’s economy or currency. As bitcoin adoption grows, that case becomes stronger.
But professional investors remain seemingly unperturbed by the inflation spike, suggesting caution even if you fully buy into bitcoin’s anti-inflation thesis.
Before this morning’s report, institutions and other big wheels were in lockstep with Fed Chair Jerome Powell’s prediction that this wave of inflation is transitory. This morning’s CPI surprise doesn’t seem to have changed their minds: Bond yields remained essentially unchanged, with yield on the 10-year Treasury note actually slipping slightly to 1.35%.
The bond market is a gauge of investor sentiment on inflation because high long-term inflation cuts into the returns from bonds, which have maturities ranging from five to 30 years. So when investors expect long-term inflation, bonds sell off, which pushes down the underlying bond’s price. That, in turn, (and this is the neat part) increases the percentage return (yield) for new buyers. That gives counterparties who are short inflation the chance to bet on that expectation, and in the process set a new consensus inflation projection. Markets are very cool sometimes!
But almost nobody is unloading and pushing those yields down further right now, despite 13-year inflation highs. Why?
The basic argument against worrying about the current inflation surge remains the same: It’s a transitory effect of the coronavirus pandemic. And if you think inflation is transitory, the five- or 10-year horizon on a Treasury bond means you’re fine just sitting on your hands – a three- or even four-month inflation spike isn’t really going to hurt you. (This is a very big-picture read, however. James Mackintosh at The Wall Street Journal takes a look at an array of other factors in bond expectations, arguing that low yields also partly reflect an expectation the Fed will hike interest rates before the end of the year.)
Most obviously, it’s key to remember these are year-over-year numbers, and last June we were still very much in the terrifying belly of the COVID-19 beast. Unemployment in the U.S. stood at 11.2%, compared to 5.9% right now. Even the stock market still hadn’t climbed back from the massive March COVID-19 crash. So, naturally, people were spending much less and pushing prices down; current year-over-year numbers simply look high against a low baseline.
Inflation is also highly concentrated in a subset of goods associated with global disruptions of the coronavirus pandemic and the surge of demand that has followed reopening in the United States. The prime example is used cars, which are currently up 45.2% since this time last year thanks to a Rube Goldberg-caliber chain of events involving semiconductor production in Asia. That alone makes up about one-third of the current inflation above previous norms.
Many of these specific categories are already coming back down to Earth. Wholesale auto prices actually dipped last month, and retail prices typically lag those by one to two months, so that’s a huge chunk of June inflation that is already working its way out of the system. The story is similar for lumber, which was the commodity inflation story of the Spring thanks to futures that as much as quadrupled. But prices were down 0.6% for the year as of Monday.
Of course, none of this definitively means inflation will disappear – we’re in the third month of the Fed’s inflation outlook being proven wrong. More profoundly, you may be skeptical of the CPI number itself thanks to changes in how it has been calculated, as CoinDesk’s Adam Levine outlined last week.
If you’re losing faith in the Fed (or didn’t have much to begin with), there’s increasingly strong empirical evidence that bitcoin should be on your shopping list: Recent data shows bBitcoin is tracking higher bond yields, and those should rise sharply if and when the broader market changes its mind about Jerome Powell’s predictions.
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