Inflation Is Slowing Down And Paving The Way For More Monetary Easing.

Inflation continues to decline in the euro zone, paving the way for further rate cuts. Good signs for Bitcoin.

The 2% target in sight

Despite some concerns raised by the ECB last month, annual inflation eased in August, at 2.2%, compared to 2.6% the previous month. It is at its lowest in three years, after peaking at over 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.

Remember, an annual inflation of 2.2% results in a nearly 25% price increase over a decade. This equals a 20% decrease in purchasing power. However, while it’s true that inflation is easing, let’s not forget that it was 16% for the years 2022 and 2023 alone in the EU.

Knowing that the actual 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.

Inflation in the euro zone is decreasing as expected, mitigating the risk that further rate cuts could derail disinflation, said ECB board member Isabel Schnabel.

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

This new drop in inflation towards the 2% target suggests that the ECB will cut its interest rates next month. “The ECB will likely cut rates again in September, but what happens next is less certain,” said Madis Muller, a member of the governing council.

Two more rate cuts are expected this year. They will follow the first cut in June, the first decrease in five years.

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

Productivity, Inflation, and Bitcoin

The core issue, as highlighted by Ms. Schnabel, is the low growth in productivity (output per person). Without it, any increase in wages will ultimately lead to a vicious circle of price increases to pay for the wage hikes…

Unfortunately: productivity = machines = energy = oil. Oil is crucial for transport. Transport is the primary limiting factor of any economy. However, the world is unable to surpass its 2018 production record…

Another problem is the fiat system is by definition a Ponzi scheme. Money being entirely derived from interest-bearing debts, the money supply (and thus debt) must continuously increase.

Continuous lending for longer terms or to more people is imperative. This is an accounting necessity for everyone to find enough money in the economy’s magma to repay their loans PLUS interest. Our monetary system is a Ponzi scheme.

Everything is fine as long as we can increase growth (primarily oil production growth). We can then match enough production with the money supply that must endlessly swell. This includes cars, houses, toys, clothes, smartphones, food, etc.

But once again, oil production growth is not keeping pace. In other words, if wages increase, the inability to boost oil production will create inflation. This is why we are at a critical point where everything seems to be falling apart. It’s not just an impression…

Therefore, as stated by the Governor of the Bank of France at Davos earlier this year, we should not expect interest rates to drop as low as before. But they will fall, alongside the Fed.

Jerome Powell announced last week at Jackson Hole that rate cuts will start, likely as early as September.

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

If the conversation on productivity interests you, don’t miss our article: “What Bitcoin will and will not be”.