Cryptocurrencies started the week off on a solid footing, with Ethereum vaulting on Nov. 8 to a new record high and Bitcoin trading close to its all-time high, ahead of a closely-watched inflation data release later in the week.
Ethereum was trading at $4,730.38 on Coinbase at 7:31 a.m. New York time, after a sharp 4 percent rally over the past 24 hours saw it briefly touch $4,753.
Bitcoin was trading at $65,843 on Coinbase at 7:31 a.m. New York time, with a 7 percent bounce over the past day pushing the benchmark cryptocurrency as high as $66,264, not far off a record high of $66,900 set in late October.
Bitcoin is the world’s biggest cryptocurrency by market capitalization, with Ethereum in second spot.
While it is unclear what’s fueling the rally in crypto, which routinely experiences sharp price swings, analysts at Coinbase say inflation is a key factor.
“The inflation narrative still dominates the headlines and people are feeling the pinch globally,” Coinbase said in its weekly email on Nov. 5. “Whether it’s gas prices in the U.S., energy prices in Europe or food prices in Latin America, the headwinds of supply chain constraints and a shrinking labor force has investors looking for a store of value.”
Investors have increasingly tended to view cryptocurrencies as a hedge against inflation, with JPMorgan saying in a note early in October that “institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold.”
Inflation is sure to be on the minds of investors as the week begins, ahead of the U.S. government’s Nov. 10 release of the closely-watched consumer price index (CPI), which will show the extent of upward price pressures in October.
Analysts expect that the month-over-month rate of consumer price inflation accelerated 0.5 percent in October, from 0.4 percent in September. The year-over-year pace of inflation is expected to edge down to 5.3 percent in October, from a reading of 5.4 percent in September, which was the highest rate in 13 years.
An upside in the actual inflation rate, when published on Wednesday, is likely to reignite calls for the Federal Reserve to raise interest rates sooner.
A number of economists have warned that, if the Fed is too far behind the curve on acting to tame surging inflation, it could force the central bank to take more drastic steps later and upend markets.
Queen’s College President and economist Mohamed El-Erian, in an Oct. 25 op-ed in Bloomberg urged the Fed to abandon its “transitory” inflation narrative and take decisive measures to rein in inflation—or risk serious consequences.
El-Erian said he fears that Fed officials will double down on the transitory framing rather than cast it aside, raising the probability of the central bank “having to slam on the monetary policy brakes down the road—the ‘handbrake turn.’”
“A delayed and partial response initially, followed by big catch-up tightening—would constitute the biggest monetary policy mistake in more than 40 years,” El-Erian argued, adding that it would “unnecessarily undermine America’s economic and financial well-being” while also sending “avoidable waves of instability throughout the global economy.”
At their most recent policy meeting, Fed officials voted to leave interest rates unchanged but opted to proceed with a gradual rollback of the central bank’s massive bond-buying program.