Market Analysis

U.S. Inflation Hits Four-Decade High of 8.6%

Key Takeaways

  • Today’s U.S. inflation numbers came in at 8.6%, hitting a fresh 41-year high and significantly exceeding economists’ expectations.
  • Inflation reaccelerating despite the Federal Reserve’s efforts to tame it down signals a bearish outlook for risky assets like stocks and cryptocurrencies.
  • The two largest cryptocurrencies, Bitcoin and Ethereum, fell by 2.6% and 3.7% on the unexpected news.

The consumer price index data shows that the U.S. annual inflation rate has hit a fresh four-decade record of 8.6%.

May CPI Prints at Four-Decade High of 8.6%

U.S. inflation data for May has topped economists’ expectations.

According to the latest data published by the U.S. Bureau of Labor Statistics today, the consumer price index increased by 1% on the month in May, placing the current annual inflation rate in the U.S. at a 41-year high of 8.6%. The bureau’s report shows that prices rose across the board, with costs for shelter, gasoline, and food being the largest contributors. The shelter index surged 0.6% in May, the most significant monthly increase since March 2004. The energy and gasoline indexes respectively rose by 3.9% and 4.1% after a temporary decline in April.

Last month’s temporary decline in inflation, which came in 20 basis points lower than in March, led many economists to believe that inflation had likely already peaked and that the Federal Reserve’s quantitative tightening policy would help keep lowering it over the upcoming months. According to a Wall Street Journal survey, economists had the May CPI forecasted at 8.3%, marking a significant misestimation of 30 basis points.

Inflation staying strong despite the Fed’s efforts to raise key interest rates and slowly begin unwinding its balance sheet may signal a bleak future for risk-on assets like stocks and cryptocurrencies. To bring inflation down to its targeted 2% rate, the Fed may have to start increasing interest rates beyond 50 basis points at a time or raise the pace at which it unwinds its balance sheet. This would make credit even more expensive, shrink the circulating supply of money within the economy, curtail consumer demand for goods and services, and eventually affect companies’ bottom lines.

Equities across the board have already corrected on the news, with the Nasdaq-100 and S&P 500 indices falling by 2.92% and 2.58% on the U.S. market’s opening. The cryptocurrency market hasn’t reacted well, with the two leading coins, Bitcoin falling by 2.6%, and Ethereum shedding 3.7% of its value. Smaller cryptocurrencies such as Aave, Chainlink, and Cardano, were hit harder, each falling by around 9%. 

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.

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