The Grand Illusion: Why “Good” Inflation Data Is Actually A Warning Sign For Investors

The latest inflation data from the United States points to a slight easing. With a year-on-year increase of three percent, the inflation rate was below the expectations of many financial institutions, which had predicted 3.1 percent. At first glance, this appears to be a positive sign: inflation is rising more slowly than expected, the markets are initially reacting with relief, and hopes for an interest rate cut are growing.

But a closer look reveals a different picture. Even though inflation is below expectations, it is still an increase compared to previous months. In other words, prices are continuing to rise, just a little more slowly. This seemingly good news obscures the fact that purchasing power continues to decline and economic imbalances remain. The optimism of many investors is therefore based on a relative comparison, not on an actual improvement in the situation.

The End of Quantitative Tightening – A Turning Point for the Markets

The moderate inflation figures could be a decisive turning point in monetary policy. The US Federal Reserve is expected to cut interest rates further in the coming days, and quantitative tightening (QT), i.e., the active reduction of liquidity from the financial system, is also coming to an end.

ADVERTISEMENTIn recent months, QT has led to capital being withdrawn from the market in order to reduce the money supply and curb inflation. The end of this measure does not automatically mean a return to expansionary monetary policy, but it does signal that the withdrawal of liquidity will be halted for the time being. For banks that are already under pressure, this could bring short-term relief.

Goldman Sachs described the upcoming meeting of the Federal Open Market Committee (FOMC) as the baseline scenario for the end of the QT program. Behind this is the growing realization that the lack of liquidity in parts of the banking sector has become a risk, one that could ultimately jeopardize the stability of the markets.

The Global Return of the Flood of Money

Not only in the US, but also worldwide, governments and central banks are turning on the money taps again. Over 80 percent of central banks are currently in “easing mode,” meaning they are increasing liquidity instead of reducing it.

ADVERTISEMENTThis change of course is particularly evident in Japan. There, the new government has put together a comprehensive economic stimulus package to cushion the burden of high prices on households. Subsidies for electricity, gas, and wages are intended to strengthen purchasing power in the short term. Ironically, however, this means that additional money is being put into circulation, which in the long term will lead to inflationary effects.

This approach highlights a fundamental dilemma of modern economic policy: measures are being taken to mitigate the consequences of inflation, but these measures ultimately exacerbate it. Short-term political gains are taking precedence over the long-term stability of the monetary system.

Government Debt and Structural Dependencies

While central banks are discussing interest rate policy and liquidity management, US government debt is reaching new record levels. At over $38 trillion, it is at an all-time high. At the same time, other countries, especially China, are becoming less willing to buy US government bonds.

US government debt (Image: )

The consequence is rising interest rates on government bonds as demand falls, while the government continues to need capital. This imbalance is increasingly being compensated for by political and economic maneuvers. New projects, funds, and even stablecoin initiatives can serve to indirectly create demand for government bonds and thus support the government’s own debt.

The system thus remains self-contained: governments create additional cash flows through new financial instruments, which ultimately flow back into their own debt service. For investors, this results in a market that is liquid but increasingly artificially supported.

ADVERTISEMENTRelevant article: Is the US planning a secret gold revaluation? Why this move could change the global financial system and Bitcoin forever

Crypto in the Crossfire of Monetary Policy

These developments are ambivalent for the crypto market. On the one hand, Bitcoin and other digital assets benefit in the long term from an expansionary monetary policy as confidence in fiat currencies declines. On the other hand, the current uncertainty means that the market is moving slowly.

Despite positive signals from monetary policy, Bitcoin remains in a phase of relative weakness. Short-term price increases following new inflation data are quickly sold off again. Trading volumes remain low and institutional inflows are stagnating.

Bitcoin price (Image: Tradingview)

Nevertheless, there are signs of increasing integration of digital assets into traditional financial structures. Major banks such as JP Morgan are gradually opening up to cryptocurrencies and will accept Bitcoin and Ether as collateral in the future. This development marks an important step toward institutional acceptance, even if implementation will initially be limited to professional market participants.

Related article: $20 billion in flames: What the Bitcoin crash really means

Between Hope and Reality – An Outlook

Current economic data paints a contradictory picture. On the one hand, there are many signs pointing to a monetary policy shift that will provide relief in the short term. On the other hand, structural problems such as high government debt, sluggish inflation, and liquidity shortages remain unresolved.

For investors, this means that markets are moving between hope and reality. Positive news is quickly priced in, but the fundamental risks remain. Caution is particularly warranted in the crypto market, which is heavily dependent on macroeconomic trends.

In the coming months, the credibility of the monetary policy turnaround will be crucial. If inflation picks up again, the apparent upswing could quickly turn out to be an illusion. However, if the expansionary policy continues, it could mark the beginning of a new phase of global liquidity with all the opportunities and risks that this entails for traditional and digital markets alike.

Author

Ed Prinz is the chairman of Austria’s most renowned non-profit organization specializing in blockchain technology. DLT Austria is actively involved in educating and promoting the added value and application possibilities of distributed ledger technology. This is done through educational events, meetups, workshops, and open discussion forums, all in voluntary collaboration with leading industry players.

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Disclaimer

This is my personal opinion and not financial advice.

For this reason, I cannot guarantee the accuracy of the information in this article. If you are unsure, you should consult a qualified advisor you trust. This article does not make any guarantees or promises regarding profits. All statements in this and other articles are my personal opinion.