The Bank of England could raise interest rates more quickly, which could make the dollar weaker and cause Double-Digit Inflation.
The cost of living in the U.K. went up by 10.1% in July, according to a government report released on Wednesday. This is the first time since COVID-19 that the UK has hit Double-Digit Inflation in a major economy, which is another sign that price pressures are spreading worldwide.
Since inflation has been a key part of the bitcoin (BTC) market story for the past couple of years, the report could make economists talk about the economy with more urgency.
John Silvia, the founder of Dynamic Economic Strategy and a former chief economist for Wells Fargo, said that faster inflation in the U.K. could make price pressures worse in other places, including the U.S.
He said, “There is a fight between what people expect from the Federal Reserve and the Bank of England.”
This year, the Bank of England has raised interest rates six times. The increase of 50 basis points in August was the largest since 1995. The U.K. central bank may raise interest rates more quickly if inflation hits 13% later this year, as expected by the bank itself.
If the BOE raises rates faster, there might be more demand for fixed-income investments in the U.K., which could increase demand for the British pound and make it worth more on foreign-exchange markets.
On the other hand, compared to other currencies, the U.S. dollar will be weaker. This means that U.S. consumers may end up paying more for imports in terms of dollars, which could add to Double-Digit Inflation at home. If the Fed were then forced to respond with more aggressive rate hikes, it would likely put pressure on markets for risky assets.
Crypto assets are seen as one of the riskiest types of assets, and since at least early 2020, bitcoin traders have paid close attention to how inflation works.
Bitcoin was thought to be a way to protect against inflation because its issuance was set to happen at a certain rate by the original blockchain code. In reality, though, real reports of inflation have caused central banks to slow down or stop printing money and tighten monetary conditions to keep economies from getting too hot. This has caused prices for risky assets like stocks and cryptocurrencies to go down.
“The value of the British pound went up after the U.S. consumer price index came in a bit lower,” Silvia said. “With the latest U.K. inflation, the pound may rise a bit more, especially if the Federal Reserve only raises the fund’s rate by 50 basis points in September.” (A basis point is 0.01 percentage point.)
Interest rates in the UK are currently at 1.75 percent, but traders expect them to go above 2 percent by the end of the year and to go above 2.6 percent by the end of 2023.
The federal funds rate in the U.S. is currently at 2.25 percent, but markets have started pricing in rate hikes that aren’t as big in the next few months. The July minutes from the Federal Open Market Committee meeting, which are set to come out on Wednesday at 2 p.m. ET, could give the markets more information about this.
Even though inflation is still rising in the U.K., the U.S. economy has gotten some relief because the latest CPI shows that prices are going up less quickly. The question is whether prices are really going down or if the latest number was just a short break. There is also a chance that prices will stay around where they are now.
“The rise in services inflation this year is a clear sign that inflation is spreading and becoming self-reinforcing,” said Brian Coulton, chief economist at Fitch Ratings. “This is a pattern that both economies share in the context of tight labor markets.”
“This is probably the part of the CPI basket that the BOE has the most control over, and it is way too high and still going up,” he said. “A similar pattern was seen in the most recent U.S. CPI print.”
