Inflation slows, paving the way for more monetary easing

Inflation continues to decline in the eurozone, opening the door to further rate cuts. A good omen for bitcoin.

The 2% target in sight

Despite some concerns raised by the ECB last month, annual inflation eased well in August, to 2.2%, from 2.6% the previous month. It is the lowest in three years, after a peak of more than 10% two years ago.

Core inflation – which excludes volatile components such as energy and food – remains high at 2.8%, compared to 2.9% in July.

As a reminder, inflation of 2.2% per year translates into an increase of almost 25% in prices after a decade. That is a 20% drop in purchasing power. However, while it is true that inflation is slowing down, let us not forget that it was 16% for the years 2022 and 2023 alone in the EU.

Knowing that real inflation is of course a few percentage points higher than the official figures… This is due to numerous accounting tricks such as “quality” or “substitution” effects.

Eurozone inflation is falling as expected, mitigating the risk that further rate cuts could derail disinflation, ECB board member says Isabel Schnabel.

“Recent data remain consistent with the baseline scenario that sees inflation falling sustainably to our 2% target by the end of 2025”she said at a conference in Tallinn, Estonia.

This further decline in inflation towards the 2% target suggests that the ECB will cut interest rates next month. “The ECB will likely cut rates again in September, but what happens after that is less certain”said Madis Mullermember of the board of governors.

Two more rate cuts are expected this year, following the first reduction in June, the first in five years.

Schnabel, however, was cautious, fearing that inflation could rebound if the economy evolves differently, particularly if wages rise faster than expected in response to the massive loss of purchasing power over the past two years.

Productivity, inflation and Bitcoin

The heart of the problem, as Ms Schnabel pointed out, is low productivity growth (output per person). Without it, any increase in wages will ultimately result in a vicious circle of rising prices to pay for the increase in wages…

Unfortunately : productivity = machines = energy = oil. Oil is crucial for transportation. Transportation is the number one limiting factor in any economy. Yet the world is failing to surpass its 2018 production record…

Another problem is that the fiat system is a ponzi by definition. Since money is entirely derived from interest-bearing debt, the money supply (and therefore debt) must not stop increasing.

We must constantly lend for longer periods or to more people. It is an accounting imperative so that everyone can find enough money in the magma of the economy to repay their loan PLUS the interest. Our monetary system is a ponzi.

Everything is fine as long as we can increase growth (i.e. primarily growth in oil production). We can then put enough production in front of the money supply that must swell relentlessly. That is, cars, houses, toys, clothes, smartphones, food, etc.

But again, oil production growth is not keeping up. In other words, if wages go up, the inability to increase oil production will create inflation. That is why we are at a pivotal time where everything seems to be going down the drain. It is not just an impression…

So, as the governor of the Bank of France said in Davos earlier this year, we should not expect rates to go back down as low as before. But they will go down, and moreover in tandem with the Fed.

Jerome Powell announced last week from Jackson Hole that the rate cut will begin, probably as early as September.

All this means that the money supply will start to grow again, which should lift the price of all assets, including bitcoin.

If you're intrigued by the productivity conversation, don't miss our article: “What Bitcoin Will and Won’t Be.”