Is Bitcoin a leading indicator of inflation?
BTCUSD Bitcoin is regarded (in some circles) as both a store of value and an inflation hedge. But what if Bitcoin is a leading indicator of inflation?
In the chart shown, we can see the various Bitcoin peaks over the years preceding local peaks in US CPI (orange). The US interest rate is in blue.
The last 4 peaks in US CPI YoY have occurred between 6.4 and 8.5 months after a peak in Bitcoin's price.
Specifically:
- June 2016 high - 37 weeks (8.5 months) later at 2.7%
- December 2017 high - 28 weeks (6.4 months) later at 2.9%
- June 2019 high - 31 weeks (7.1 months later) at 2.5%
- November 2021 high - 33 weeks later (7.6 months later) at 9.1%
It's also worth noting that the sequence of highs is the same; both BTC and CPI have a lower high, a higher high, lower high, then higher high.
The peaks in 2011 and 2013 coincided with CPI highs 15 and 26 weeks later, but 2016/2017 was the time when crypto first entered the public's awareness.
So why does this happen? Do Bitcoin whales buying lambos stimulate inflation?
I'm joking, but I genuinely don't know, and I hope someone can explain lol.
I've wondered if it's a case of correlation in that rising inflation is usually a sign of easy financial conditions—the ideal conditions for a risk asset like BTC to pump—with Bitcoin being the first to benefit as the ultimate risk asset (at least in the world of mainstream finance). I'm not sure though.
The most concerning thing is the implication. We recently just made another all-time high in Bitcoin, but CPI sits at 3.4% at the time of writing, having moved sideways for almost a year now.
As for whether this is a crazy coincidence, or me reaching to an astronomical degree, I don't know.
The average period of time over these last 4 periods is 32 weeks, or around October/November time. The only catalysts I see are the US government spending money like it's going out of fashion and rising commodity prices.
I'll also note that there doesn't seem to be any correlation with lows in inflation.
Personal opinion on inflation:
US inflation is stalling, rising, and falling across different measures. Producer prices, services inflation, annual PCE, and some core measures are tilting up. The only real decline recently has been core CPI.
It's also interesting to note that 1 and 5-year Michigan inflation expectations are 3.3% and 3%, respectively.
Multiple Fed officials have been hawkish lately:
Fed's Barr: Q1 inflation was disappointing, it did not provide the confidence needed to ease monetary policy.
Fed's Mester: Inflation risks are tilted to the upside.
Fed's Bostic: It would not surprise me if it took longer to get to 2% inflation in the US than elsewhere.
Given that we've reached a peak in interest rates (for the time being) but inflation has been moving sideways for around a year now, something has to change.
It could be argued that monetary policy still needs time to work, but that doesn't really mesh with measures of inflation stalling or rising over the past year. Wouldn't the lag effect continue working to drive inflation lower? Likewise, why would the US economy be growing as fast as it is?
One or more of three things will need to change: inflation, unemployment, or interest rates.
Unemployment is at 3.9%, low by historical standards but rising since early 2022.
Inflation, especially with what we've seen here, may also be on the rise soon.
If the main lever the Fed has is monetary policy, it faces a dilemma. The data doesn't support a rate cut right now, while unemployment is rising slowly. If inflation begins to rise again, it may need to hike interest rates—not ideal when Joe desperately needs one for the upcoming election.
This scenario of high inflation and high unemployment—stagflation—is what JPMorgan's CEO, Jamie Dimon, has been warning of:
'It’s a warning Dimon has issued before, previously saying he fears America is headed for a repeat of the 1970s when everything “felt great” and then quickly about-turned to a period of high unemployment and inflation paired with low demand, also known as “stagflation.”
Appearing at AllianceBernstein’s Strategic Decisions conference on Wednesday, Dimon said he simply can’t see how the past five years of massive fiscal and monetary stimulus could result in anything other than this scenario.
As it stands, the US dollar looks ready to surge higher and clear 2023 highs:
While SPY and BTC, adjusted for inflation (CPI figure taken from first day of trading), sit below their 2021 highs:
I am aware that the human tendency to look for patterns and confirmation bias may be clouding my judgement. However, in my view, the market is severely underestimating the risk of higher inflation and a potential interest rate hike, which I believe will drive the dollar higher throughout the rest of 2024.
According to the Bitcoin chart, another wave of inflation could be back above 7%+. I personally find that hard to imagine, but second round effects in the 1970s saw inflation shoot past its previous peak. Deutsche Bank has drawn parallels with the 1970s.
Long-term views:
- Long USD, Oil
- Short risk assets (equities, crypto)
- Unsure on gold and silver but skewed lower
For these views to be truly validated, I would like to see:
This is not financial advice, nor a recommendation. I wrote this to bring attention to something strange I'd found, and strongly encourage you to do your own research. Thank you for reading.
Note
While there hasn't been a catalyst for inflation rise again as of yet - US YoY CPI inflation is down to 2.5% right now from 3.3% in May when I posted this - the average timeline for CPI rising after Bitcoin was 7.4 months.
BTC rose in March, putting the projected rise between October and November. Now, there is a real catalyst for a potential rise in inflation - Hurricane Milton.
After Katrina in August 2005, CPI jumped from 3.6% to 4.7% between August and September. Katrina caused around $125 billion in damage. Katrina was a category 5 hurricane, as is Milton. Projections range from $50 billion to $175 billion worth of damages.
While it's difficult to envision a major spike in inflation back to 5-6% this time round, Katrina also didn't follow historic highs in inflation - peak inflation in the 2000s before Katrina was 3.8% in March 2000.
The takeaway is that Milton could be the trigger for another rise in inflation. This could also be offset slowing in employment - NFPs tanked from 198k to 57k back to 97k in Aug, Sept, and Oct 2005 respectively. 1Y inflation expectations are low right now, at 2.7%, which may help stem any second-round inflation.
There is a risk that this may put the Fed on the backfoot and delay further interest rate cuts, with the next meeting in November.
Sources/some reading:
tradingeconomics.com/united-states/inflation-cpi
tradingeconomics.com/united-states/non-farm-payrolls
tradingeconomics.com/united-states/michigan-inflation-expectations
en.wikipedia.org/wiki/Hurricane_Katrina
cnbc.com/2024/10/08/hurricane-milton-could-cause-as-much-as-175-billion-in-damages-according-to-early-estimates.html
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