The figure released yesterday regarding the average annual inflation reached in October 2021 in the US (6.2%) is the highest in 30 years.
US inflation, market reaction
It is also significantly higher than both expectations and the recent trend, as it had never exceeded 5.4% in 2021.
According to eToro global markets strategist Ben Laidler, this figure will force the Fed to refocus its attention on the risks posed by such high inflation, but it is unlikely to force it to change its plans for a gradual tapering. In other words, he says that the US central bank’s forthcoming decisions are unlikely to derail equity markets.
Yesterday, following the release of the data, the S&P 500 index opened the session with a modest -0.5%, before recovering and falling back to close at -0.8%, not at all worrying.
Inflation, however, is clearly on the rise in the US, having risen 0.9% from 0.4% in the previous month. The increase is mainly due to energy costs, but is also spread across a wide range of other goods and services.
In addition, the figure was also affected by Chinese inflation, which rose more than expected, particularly with regard to production costs in local industry.
Laidler says that renewed inflation fears could push the dollar higher and cause more volatility in the markets, particularly after the recent strong rally that has taken several US indices to all-time highs in recent days.
For example, the Dollar Index yesterday hit an all-time high, surpassing 95 for the first time since July last year.
Laidler also believes that inflation is likely to remain high for a long time, but speculates that it may start to decline during 2022 as economic growth rates fall and producers have to adjust accordingly.
The effects of inflation on cryptocurrencies
The release of this data yesterday also pushed up the crypto markets, and in particular Bitcoin, which set a new all-time high.
Cryptoasset analyst at eToro, Simon Peters, comments:
“Bitcoin hit a new all-time high, triggered by painfully high inflation numbers from the US. The news that US inflation hit 6.2% sent the price soaring to over $69,000. It is inspiring to see the price react so spectacularly. Not only is it a sign that the market is extremely averse to inflationary pressure, but it is also a sign that investors are now firmly using bitcoin as a hedge against rising prices. It is also an indication that institutional investors may be participating in ‘buying the news’ as this is the type of movement we typically associate with other markets reacting heavily to economic news”.
Peters also points out that while central banks around the world are forced to keep up with inflationary risks, Bitcoin appears to be an asset to hold in a portfolio because it is impervious to the effects of value erosion.
Bitcoin is described as “a deflationary asset with a set limit of coins that can enter circulation”, and investors seem to see this as reason enough to add it to their portfolios to hedge against inflationary risks.
It remains to be seen, however, how far this surge in cryptocurrency prices will go.
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