Bitcoin and Ethereum waver as US inflation drops to 2.5% in August

Bitcoin prices fell slightly on Wednesday after a widely watched measure of inflation showed that US consumer prices rose less than expected in the 12 months through August.

The Consumer Price Index (CPI) rose 2.5% annually, the Bureau of Labor Statistics (BLS) reported Wednesday. Economists had expected the index, which tracks price changes in a basket of goods and services, to rise 2.6 percent annually.

Monthly inflation rose 0.2 percent in August, matching the July increase in CPI. Before that, consumer prices fell 0.1% in June, the first time CPI has been negative since 2020.

Immediately after the report was released, the price of bitcoin fell to $56,500, a 1.5% drop over the previous day. Meanwhile, cryptocurrencies such as Ethereum and Solana fell to $2,300 and $130, respectively.

“Overall, it's a very positive report now that a 25-basis-point decline is very likely for next week,” Tom Dunleavy, partner at MV Global, told Decrypt. “I think the near-term implications for Bitcoin are pretty much locked in.”

Dunleavy said November's presidential election will have more of an impact on Bitcoin's price than monetary policy, as the Fed begins its expected rate cuts. In fact, Bernstein analysts predicted on Monday that there could be a $50,000 difference in the price of Bitcoin depending on which candidate wins the White House later this year.

New U.S. inflation data will be one of the last big data points officials consider as the Federal Reserve prepares for its policy meeting next week. The U.S. central bank is widely expected to begin a series of rate cuts on Wednesday as inflation shows signs of cooling toward its stated 2% target.

The question driving markets — and Bitcoin investors — is how quickly the Fed will cut interest rates as the economy continues to cool. Traders leaned toward the first 0.25% cut last month, penciling in a 67% chance on Tuesday, according to CME Group's FedWatch tool. Following the new price reading, the odds of a 0.25% decline have strengthened to an 85% chance.

In the past year and a half, the Fed has raised interest rates nearly a dozen times, making it more expensive to borrow as it tries to rein in a decade of inflation. With inflation slowing, the Fed is more focused on the overall health of the labor market.

The US job market is also influencing the price of Bitcoin.

For example, asset prices fell to $53,300 last week after a softer-than-expected US jobs report. While economists had expected employers to add 160,000 jobs in August, the BLS reported that employers added 142,000 jobs last month, and job growth figures for the previous two months were revised lower.

While lower lending rates are expected to be good news for risky assets like Bitcoin, Bitfinex analysts previously told Decrypt that they could cause short-term headwinds by “selling the news event”. Typically, they say, stock indexes like the S&P 500 dip following a decline in prices.

Last week, Federal Reserve Board Governor Christopher Waller pointed to challenges with the timing of the Fed's rate cuts. While a 25 basis point cut will give officials time to monitor the impact on the economy, they could derail the Fed if the economy slows too much.

“I don't expect this first cut to be the last,” Waller said. “I am open-minded about the size and pace of cuts, which will depend on what the data tells us about the evolution of the economy.”

Still, the start of tapering on a smaller scale could be a better signal for the Fed to send to markets, Brian Ruddick, senior strategist at market maker GSR, told Decrypt.

“If you cut it by 50 basis points, you can disrupt the markets,” he said. “It may indicate that they are more concerned with growth than they really need to be.”

Edited by Stacy Elliott.

Editor's note: This story was updated after publication to add a comment from GSR Ruddick.