US CPI Preview: Inflation Likely to Climb to New 40-Year High

U.S. consumer prices probably rose 1.1% in June, pushing the year-on-year change to a four-decade high of 8.8%, FXStreet data shows. A reading above that could bring renewed selling pressure to risk assets, including bitcoin (BTC).

The U.S. Labor Department will release the widely tracked consumer price index (CPI) measuring the cost of living in the world's largest economy on Wednesday at 12:30 UTC. Core inflation, which strips out the volatile food and energy component, is expected to be 0.6% month-on-month, or 5.8% for the year.

The White House was in a damage control mode early Monday, calling the forecast bump in inflation a backward-looking and out-of-date figure skewed higher by energy and food prices, which have retreated over the last couple of weeks.

A higher-than-expected inflation print, particularly for core CPI, would validate the Federal Reserve's strategy of combating price pressures with aggressive rate hikes and balance sheet runoff, bolstering the dollar rally and bringing renewed selling pressure to risk assets, bitcoin among them.

Fed fund futures show expectations for a 75 basis points rate increase later this month are fully priced in. Traders have also baked in a 50 basis point hike in September and 25 basis points raises in November and December. The central bank has raised rates by 150 basis points to the 1.5%-1.75% range since March.

A hotter-than-expected figure may also see traders scale back expectations for Fed rate cuts next year. At press time, rates traders are pricing in an easing of monetary policy in the second half of 2023 to reverse the tightening cycle's negative impact on economic activity.

On the flip side, bitcoin and other risk assets will probably rally if core inflation eases, reviving the "inflation has peaked" narrative and strengthening the case for the Fed to slow policy tightening in the coming months.

Here is how some observers expect the CPI to influence bitcoin.

Matthew Dibb, COO and co-founder of Singapore-based Stack Funds, told CoinDesk:

"We believe it is largely priced in, but any deviation from the forecast will bring huge volatility. Bitcoin has been trading heavily 'risk off' since Sunday in anticipation of macro news this week and is approaching recent support.

"If a print comes in higher than 8.8%, it's likely BTC will be approaching the $18,000 handle in the short term."

John Kicklighter, chief strategist at DailyFX, said:

"Wednesday's CPI is a capable catalyst to put the markets back on the move, but it is a higher bar to generate broader traction in 'risk trends' that will pull bitcoin and crypto further down along with other traditional speculative assets. On the other hand, another extension for the dollar, which is trading between 20 and 35-year highs against its largest counterparts (euro, yen and pound), could certainly throttle this principal alternative-to-fiat."

Vetle Lunde, an analyst at Arcane Research, noted in the weekly report:

"Be prepared for volatility following Wednesday's CPI print at 08:30 E.T. Inflation surprises towards the upside lead to enhanced expectations of further tightening of monetary policies by the Federal Reserve.

"These contractionary policies have a broad impact on equities, and this macro backdrop has been an important factor in bitcoin's bear market since November 2021."

The monthly U.S. inflation reports have persistently injected volatility into the bitcoin market this year, with above-forecast figures leading to price declines.

Michael Boutros, a strategist at DailyFX, said:

"It’s either a bear-flag or an wedge/consolidation formation [on bitcoin's daily chart] around the monthly open. Either way it does look similar to the May – June [pre-CPI] setup.

"A quick study on the May/June price pattern suggests another few days of consolidation before another potential decisive break lower. A break below 17,792 is needed to fuel the next leg lower towards the 2019 high at 13,880 and the 100% extension of the entire sell-off at 12,079 – an area of interest for possible support IF reached. Ultimately bitcoin would need to breach/close above 25,850 to invalidate this current downtrend."

Simons Chen, a private equity fund manager, said:

"If the June CPI data shows inflation has continued to expand, and exceeds market expectations, the Fed is bound to raise interest rates hard and fast in the second half of the year, right through to year-end.

"In December, we expect the interest rate will quickly reach 350 basis points or higher (3.5%+), and it will likely remain in the 350~400 basis points range or higher throughout 2023 to curb high inflation. At present, commodities and stock markets have already pulled back from their recent peaks by around 30%~50%+, based on expectations of rising interest rates.

"Meanwhile producer price index has eased. But the short-term decline is not sufficient to reduce the long-term inflation rate, unless we see raw materials return to lower levels."

UPDATE (July 13, 11:25 UTC): Adds comment from Simons Chen.