Fact or Fiction…
After an unusually hot afternoon getting into a squabble with the next-door retail vendor who sold your favourite soda drinks for N150 and a bag of pure water for N250, one would struggle to agree with an inflation report that tells you that prices are rising at a slower rate.
The recently released inflation report was met with scepticism, as analysts and economists had to swallow their inflation projections in what appeared to be an unexpected decline in the rise in the inflation rate.
The headline index rose by 18.12% YoY in April 2021, which is 0.05% lower than the 18.17% increase recorded in March 2021. The jaw-dropping aspect of the report was with regards to the food segment, where both yearly and monthly inflation rates increased at a slower rate.
The food subindex printed at 22.72% YoY in April 2021, which is 0.23% lower than the 22.95% uptick recorded in March 2021.
Inflation…
This is the second surprising macro report we are getting this year since the unexpected fourth-quarter GDP report. As usual, we would rather clarify the factual basis to which the numbers were achieved.
Firstly, it can be observed that transportation cost has been taken off the list of major drivers for the core segment, and this has particularly affected the cost of haulage for various food items. Hence, such an improvement would help temper a further uptick in prices.
Secondly, we will also allude to the possibility of the partial border reopening carried out in January kicking into effect now, as certain scarce food items have managed to filter their way into the country.
The equity market is likely to find some support in this news, as the possibility of an increase in the benchmark interest rate weakens, considering the slowdown in inflation. The news will provide further support for current yield levels in the fixed income space. Nevertheless, inflation remains in dangerous territory and, the market has priced in most of the associated risks in the first quarter of the year.
“Bitcoin really an inflation hedge?”
This is one of the recent arguments that has gained a lot of attention in recent months. The logic is, unlike U.S. dollars or any other currency, bitcoin is designed to have a limited supply so, it cannot be devalued by a government or a central bank distributing too much of it.
The Argument for Bitcoin’s performance over the last year is directly aligned with movements in bond yields. When yields rise, so does bitcoin. This implies that the digital currency benefits directly from the “reflation trade” or the belief that inflation is coming.
Bitcoin vs 10-year US treasury yield
The Argument Against; The price is not just driven by the money-supply rule, it is driven by other speculative forces. That is why it is multiple times more volatile than the stock market. If inflation-induced a recession, for example, investors might respond by stepping away from riskier assets such as cryptocurrencies.
So how is this an inflation hedge? Let us look at the recent events and see how each argument holds up.
Inflation Highway…
Guess we have passed the rhymes to the U.S. as Inflation in April accelerated at its fastest pace in more than 12 years. The increase in the annual headline CPI rate was the fastest since September 2008, while the monthly gain in core inflation was the largest since 1981.
Energy prices overall, jumped 25% from a year earlier, including a 49.6% increase for gasoline and 37.3% for fuel oil. That came even though most energy categories saw a decline in April.
Excluding volatile food and energy prices, the core CPI increased 3% from the same period in 2020 and 0.9% monthly. In addition to rising prices, one of the main reasons for the big annual gain was because of base effects, meaning inflation was very low at this time in 2020 as the Covid pandemic caused a widespread shutdown of the U.S. economy.
Year-over-year comparisons are going to be distorted for a few months because of the pandemic’s impact.
So which argument holds water?
Bitcoin vs 10-year US Treasury Yield
“The Invisible Hand or the visible hand of Musk”
Chief Executive Elon Musk said on Wednesday, Tesla Inc (TSLA.O) will no longer accept bitcoin for car purchases, pointing to the long-brewing environmental concerns for a swift reversal in the company’s position on the cryptocurrency.
Bitcoin fell more than 10% after Musk tweeted his decision to suspend its use, less than two months after Tesla began accepting the world’s biggest digital currency for payment. Tesla’s stronghold on cryptocurrency started last year after Tesla revealed in February it had bought $1.5 billion of bitcoin, before accepting it as payment for cars in March, causing an estimated 20% surge in the cryptocurrency.
How much power does bitcoin really consume?
Bitcoin is created when high-powered computers compete against other machines to solve complex mathematical puzzles, an energy-intensive process that currently often relies on electricity generated with fossil fuels, particularly coal.
At current rates, bitcoin “mining” devours about the same amount of energy annually as the Netherlands did in 2019, according to data from the University of Cambridge and the International Energy Agency. So, if you are thinking of mining bitcoin in Nigeria, you may need to rethink.
Given the recent development and stronghold of Large bitcoin holders on the Market, the Argument against which states, “the price is not just driven by the money-supply rule, it is driven by other speculative forces” seems to be making a strong case. Nevertheless, we expect the recent decline in bitcoin to provide entry points for bitcoin believers.
