The Resurgence of Inflation Watches Bitcoin Bulls, Loose Financial Conditions Are the Main Obstacle

Bitcoin investors are leading the reality: their expectations for a quick drop in interest rates may no longer be achievable. A new study from top economists provides a clear warning—the inflation in the United States could reach 4% this year, surpassing most expectations. This directly contradicts the strategies of Bitcoin bulls who rely on disinflation and lower borrowing costs to bring color to the cryptocurrency market.

This projection comes from a thorough analysis by Adam Posen of the Peterson Institute for International Economics and Peter R. Orszag of Lazard, two prominent economic advisors with significant influence on investment decisions. Their reminder is no small matter—it signals the need to change market assumptions about how the Federal Reserve will respond in the coming year.

Why the Projected Inflation Could Reach 4% in 2026

Economists have identified several economic headwinds that could prolong inflationary pressures in the market. The official consumer price index drops to 2.7% in 2025, the lowest since 2020, but this strength may be only transitory.

Amid potential changes in economic policy, many factors are positioned to push prices upward. Tariffs on imports are a major concern—when importers face higher costs from tariffs, they pass these costs on to consumers. This process creates a “delayed pass-through” where consumers initially wait before purchasing, but after a short period, prices rise significantly.

Analysts project that by mid-2026, the delayed price pass-through should be nearly complete. This could add up to 50 basis points to overall inflation during that period.

Factors Driving Prices Up: From Tariffs to Tight Markets

It’s not just tariff influence. Tighter conditions in the labor market could also contribute to inflationary pressures. If deportations result in a labor shortage in sectors relying on migrant workers, wages will rise to attract a smaller available workforce. Higher wages often drive consumer spending and demand-driven inflation.

Furthermore, increased government spending could boost prices. If the U.S. budget deficit exceeds 7% of GDP, the larger money supply in the economy will increase demand, pushing inflation higher.

Economists emphasize that these factors are stronger than the disinflationary trends the market consensus focuses on. The continued decline in housing inflation and productivity gains from AI are not enough to counterbalance these price pressures.

Loose Monetary Policy and Rising Treasury Yields

Loose monetary conditions have also contributed to inflation concerns. When money and credit are easier to obtain in the market, consumers and businesses spend more, increasing demand and prices.

The projection of higher inflation coincides with rising global bond yields. U.S. Treasury yields reached 4.31% this week, the highest in five months. Higher yields attract more conservative investors, making riskier investments like stocks and cryptocurrencies less appealing.

Bitcoin has fallen nearly 4% to $88.25K this week, according to the latest market data. The higher Treasury yields create stronger competition for investor capital, pushing Bitcoin and other risk assets lower.

Bitcoin in the Middle: No Support from Looser Fed, High Bond Yields

Bitcoin’s rise relies on a simple narrative: lower inflation, lower rates, more money in crypto and risky assets. But the new inflation projection breaks part of that story.

If inflation remains higher than expected, the Federal Reserve will be more cautious about cutting interest rates. Many investment banks project 50-75 basis points of rate cuts this year, but higher inflation could cause the Fed to act more slowly. Crypto bulls hope for more aggressive cuts, but data supports that this may not be the case.

Another layer of complexity is the Treasury yield environment. With global bond yields rising—especially Japanese government bonds reaching record highs—more investors will prefer “safe” assets over risky ones. Bitcoin, which has been treated more as a high-beta risk asset rather than a macro hedge, is particularly vulnerable to this shift.

The consolidation Bitcoin is undergoing—about 30 percent below its October peak—indicates bearish sentiment. Resistance near $89,000 remains difficult to break, reflecting insufficient bullish momentum.

What’s Next for the Cryptocurrency Market

This scenario creates a challenging environment for Bitcoin and crypto bulls. The disinflation bet is no longer as certain, and the “looser Fed” narrative remains largely in the realm of wishful thinking.

For serious market participants, the new understanding of inflation trajectories means being more cautious with risk management and focusing more on fundamental changes in monetary policy rather than just hoping for the best.