Bitcoin and Ethereum Waver as US Inflation Slows to 2.5% in August

The price of Bitcoin was slightly down Wednesday after a widely watched inflation gauge showed that U.S. consumer prices rose less than expected in the 12 months through August.

The Consumer Price Index (CPI) rose 2.5% on an annual basis, the Bureau of Labor Statistics (BLS) reported Wednesday. Economists expected the index, which tracks price changes across a basket of goods and services, to increase 2.6% year over year.

On a monthly basis, inflation rose 0.2% in August, matching July’s increase to CPI. Prior to that, consumer prices declined 0.1% in June as CPI flipped negative for the first time since 2020.

Immediately after the report’s release, the price of Bitcoin edged down to $56,500, posting a 1.5% decrease over the past day. Meanwhile, cryptocurrencies like Ethereum and Solana fell to $2,300 and $130, respectively.

“All in all, it’s a very positive report now that leads to a 25-basis-point cut now being very likely for next week,” Tom Dunleavy, a partner at MV Global, told Decrypt. “I think the near term implications for Bitcoin are fairly muted.”

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

The new U.S. inflation data will be one of the last big data points officials will 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% goal.

The question guiding markets—and Bitcoin investors—is just how fast the Fed will lower its benchmark interest rate as the economy continues to cool. Over the past month, traders have leaned toward an initial cut of 0.25%, penciling in a 67% chance Tuesday, according to the CME Group’s FedWatch Tool. Following the fresh inflation readout, the odds of a 0.25% rate cut strengthened to a 85% chance.

Over the past year and a half, the Fed has lifted interest rates nearly a dozen times, trying to tame a decades-high bout of inflation by making it more expensive to borrow. As inflation concerns have receded, the Fed has focussed more on the labor market’s overall health.

The U.S. labor market is influencing Bitcoin’s price too.

For example, the asset’s price fell as low as $53,300 last week after a U.S. jobs report came in softer than expected. While economists expected employers would 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 borrowing rates are expected to be good news for risk assets like Bitcoin, Bitfinex analysts previously told Decrypt that they could cause short-term headwinds as a “sell the news event.” Typically stock indexes like the S&P 500 dip following a rate cut, they said.

Last week, Federal Reserve Board Governor Christopher Waller highlighted challenges with the Fed’s rate cut timing. While 25 basis point rate cuts would give officials time to monitor their impact on the economy, they may hamstring the Fed if the economy is slowing too much.

“I do not expect this first cut to be the last,” Waller said. “I am open-minded about the size and pace of cuts, which will be based on what the data tell us about the evolution of the economy.”

Still, beginning with a smaller rate cut might be a better signal for the Fed to send to markets, Brian Rudick, a senior strategist at the market maker GSR, told Decrypt.

“If they cut by 50 basis points, they could spook the markets,” he said. “It could actually signal that they're more worried about growth than maybe they need to be.”

Edited by Stacy Elliott.

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