The U.S. Bureau of Labor Statistics published new monthly Consumer Price Index (CPI) data Wednesday, and as far as the state of the macro-economy is concerned, the numbers seem about as good as could have been expected. The rate of inflation declined in December, down to a 0.5% monthly rise in the standard CPI measure, compared to 0.8% rise in November. The main driver of the month-to-month change was a broad decline in energy prices in December. In particular, fuel oil used for winter heating dropped 2.4% month to month.
Make no mistake: The December numbers are still abnormally high and would be worrying in a vacuum. On an annual basis, 2021 inflation was 7%, which is the highest annual rate since 1982. But the 37% month-over-month decline in CPI growth, hopefully, means we’re headed back to more normal territory – “more normal” here meaning 3%-4% yearly inflation in 2022, not the 2% target inflation rate set by the Federal Reserve, which was maintained or even undershot for years before the coronavirus pandemic.
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The new CPI numbers had a noticeable effect on bitcoin, the price of which bounced about 1.6% on the announcement before retreating slightly. The effect on the S&P 500 and Dow Jones Industrial Average (DJIA) was milder, with small pops that have now been mostly given back.
Those numbers make for an interesting contrast. A naïve reading would suggest bitcoin is reinforcing its inflation-hedge thesis, but the stock performance might seem more confusing. In a vacuum, this morning’s numbers were still quite high, which in a different year would have sent stocks tumbling over fears of a Fed interest rate hike.
Stocks didn’t crash for a reason so simple it can be easily overlooked by market newbies: the role of expectations. The professional traders who dominate equity markets are not, by and large, frantically trading in response to CPI numbers the morning they’re released. Instead, they’ve been trying to predict the CPI numbers for weeks and trading on those projections ahead of the actual numbers. By the same token, the Fed has already announced its plans to raise interest rates and cut its bond balance sheet this year, tightening the money supply and likely hurting stock performance.
As it happens, actual CPI growth came in just barely higher than Wall Street’s “consensus expectation,” which was for a 0.4% rise, according to Barron’s. So in the simplest terms, equities didn’t move much this morning because the actual CPI number was “priced in” based on trading before the announcement. That’s why tech and other “growth” stocks in particular, which are generally more dependent on cheap capital, have been slumping for months. We might have seen big equity swings today if inflation had instead come in well above or below the consensus.
Understanding how these sorts of expectations work is key to parsing asset markets. While they’re suddenly gaining significance in the CPI discourse, they’ve been central to the stock market for decades in the form of analysts’ quarterly revenue projections for publicly traded companies. Weirdly, and for reasons I still don’t understand after nearly a decade of finance reporting, the business press isn’t in the habit of citing its sources for various “consensus projections,” so they can seem like they’re just pulled out of thin air. But they generally come from surveys of analysts or an average of their published projections, and are one of the pieces of data that are still easiest to find through an old-fashioned Bloomberg terminal.
(Crypto assets are notable here for lacking the regular reporting structure that makes professional projections so acutely significant, though crypto-linked stocks like Coinbase are subject to the same dynamic.)
So now we turn to bitcoin, where the expectations game appears to be played much differently. It should be noted first that overall, inflation still has less influence on bitcoin’s price than many other speculative factors – the idea that bitcoin is an “inflation hedge” is still at least somewhat theoretical. After a sharp drawdown over the last two months, bitcoin is currently seeing a short-term rebound that’s arguably mostly about bargain hunters buying the dip.
But in the shorter term, inflation is clearly guiding investor behavior. BTC trading volumes surged immediately after the 8:30 a.m. ET (13:30 UTC) CPI drop, meaning a significant number of people are trading bitcoin as if it were a functional inflation hedge. If you bet heavily on a slight inflation beat by buying bitcoin at 8:29 a.m. this morning, you made money by 9 a.m. That’s a risky trade analogous to what stock traders do frequently.
But the contrast with stocks is revealing. In bitcoin, for reasons that would be too complicated to dive into here even if I fully understood them, it appears inflation projections are not smoothly “priced in” ahead of monthly announcements. You could have bought BTC on the actual CPI print at 8:31 a.m. and made nearly the same amount of money by 9 a.m. as the guy who was taking a risk on unknown numbers at 8:29 a.m.
Assuming the inflation-hedge narrative holds up, this trade is basically an inefficiency that won’t last as the bitcoin market matures. A lot of pros and serious traders are clearly taking advantage of it, but at least for the time being it’s also still available to the little guy.