Wholesale prices in the United States rose in January, and food and energy costs rose. According to the PPI and CPI data for January 2025 released by the Bureau of Labor Statistics last week, the PPI rose to 0.4% month-on-month, lower than the revised previous value of 0.5%, but higher than the expected 0.3%, and the year-on-year growth rate rose to 3.5%, higher than the market expectation of 3.2%, the largest increase since February 2023. The core PPI rose by 0.3% month-on-month and 3.6% year-on-year; CPI increased by 3.0% year-on-year, the previous value was 2.9%, and the market expected 2.9%, and the core CPI increased by 3.3% year-on-year, the previous value was 3.2%, and the market expected 3.1%.
Both CPI and PPI rebounded beyond expectations, with food prices increasing month-on-month and energy prices falling month-on-month. CPI has rebounded month-on-month for four consecutive months, and the risk of inflation rebound is still very strong. Trumps tariff increase has brought about the risk of secondary inflation. It can be considered that before seeing the easing of inflation pressure, the pace and intensity of interest rate cuts this year will slow down or it is a high probability event.
How to interpret the recent CPI and PPI data?
According to the monetary policy report submitted by Powell to Congress, which details the Feds views on interest rates, inflation, employment, and the economy over the past year, the Fed mainly focuses on the PCE index. When assessing the inflation outlook, it mainly considers: core goods, housing services, and core non-housing services. Powells speech on February 11 has made clear the pace of the Feds interest rate adjustments. If the economy remains strong and inflation fails to continue to fall back to 2%, the current policy restrictions can be maintained for a longer period of time.
The high inflation data on February 12 basically laid the foundation for this. From the perspective of inflation, interest rate cuts before the middle of this year are not considered for the time being. According to detailed data, the decline in core commodities has widened, inflationary pressure has weakened, and the stubborn point of inflation is still core non-housing services.
Wall Street traders have already put the next rate cut expectations in December this year. One point that needs attention is that the Los Angeles wildfires in January may affect the markets pricing of inflation. A large part of the reason for the current markets concerns about inflation rebound is that inflation has rebounded for four consecutive months. The CPI increase caused by wildfires is a systemic risk event to some extent. After excluding the wildfire conditions, it may not be possible to conclude that it has rebounded for four consecutive months. From the perspective that the Trump administration has been working hard to end the Russian-Ukrainian war, if the Russian-Ukrainian war ends as soon as possible, it may lead to a decline in the prices of building materials, energy, and agricultural products, thereby reducing inflation. In the future, it is very likely that new data will slowly save pessimistic expectations and increase expectations for the number and intensity of rate cuts.
The transmission principle of inflation, employment and interest rate cuts
Powell: Our focus, whether or not to cut interest rates, should continue to be on controlling inflation and promoting employment.
The Consumer Price Index (CPI) is a macroeconomic indicator that measures changes in the price level of consumer goods and services. It reflects the degree of inflation or deflation by counting changes in the prices of a basket of representative goods and services. When the CPI continues to rise, it means that consumers need to pay more money to buy the same amount of goods and services, which is usually regarded as a signal of inflation; while the Producer Price Index (PPI) mainly measures the trend and degree of change in the ex-factory prices of industrial enterprises products. Changes in the PPI will affect the CPI, because changes in producer costs will gradually be transmitted to the consumer end through the industrial chain.
Generally speaking, moderate inflation has a certain stimulating effect on the economy, but if inflation is too high, it will affect economic stability and residents living standards. When the inflation rate is lower than the target level and has a continuous downward trend, it may indicate insufficient economic growth momentum. At this time, interest rate cuts may be used to stimulate the economy, increase inflation expectations, and return inflation to a reasonable range. However, if inflation is at a high level, the central bank will usually adopt a tight monetary policy such as raising interest rates to curb inflation.
Non-agricultural employment data reflects the changes in employment in industries other than the agricultural sector. An increase in this data indicates that companies need to hire more workers to expand production or business, which means that the job market is prosperous and the overall employment situation is improving; while the unemployment rate refers to the ratio of the unemployed population to the labor force.
When the job market performs poorly, such as high unemployment and persistently low non-farm payrolls, economic growth may be hampered. In order to stimulate the economy and increase employment opportunities, a monetary policy of lowering interest rates may be adopted to reduce corporate financing costs, encourage companies to expand investment and production, and thus create more jobs.
Are there any other reasons for BTC to rise?
According to a report on February 13, the U.S. federal budget gap expanded to a record $840 billion in the first four months of this fiscal year. On February 14, Dalio also said in public: The United States must reduce its budget deficit from 7.5% of GDP to 3%, otherwise it will enter a debt death spiral. Now the United States is like a patient on the verge of a heart attack and needs emergency intervention.
At present, the signs of the US debt crisis have already appeared. The scale of US debt exceeds 36 trillion, and interest expenses have accounted for 4% of the annual GDP, 22% of the annual fiscal revenue, and nearly a quarter of the government revenue needs to be used to pay interest. From this perspective, if the Federal Reserve continues to maintain high interest rates, the risk of a debt crisis will become greater and greater. It is more likely that the Fed will ignore the turbulence of the macro environment, give up short-term policy opportunities, and seize the main contradiction - debt crisis to cut interest rates and release money.
In addition to the narrative of macro interest rate cuts injecting liquidity into risk markets, another very important narrative for the Crypto market is the inclusion of BTC in strategic reserves, not only at the national level but also at the state fiscal level. This means that if this reserve is approved, the state treasury will directly purchase BTC, with a total purchasing power of 250,000 BTC, which means that nearly 1% of BTCs liquidity is locked up. The emotional encouragement and supply reduction effects brought about by this may once again form a flywheel rise in the cryptocurrency market.
