Rising Cost Pressures: How Cost Push Inflation Could Derail Crypto's Disinflation Bet

Recent analysis from leading economists signals a troubling scenario for cryptocurrency investors betting on deflation and aggressive interest rate cuts. Adam Posen of the Peterson Institute for International Economics and Peter R. Orszag of Lazard warn that U.S. inflation could climb above 4% in 2026—a stark reversal of market expectations. This cost push inflation threat directly contradicts the narrative that helped fuel crypto enthusiasm last year.

The core issue revolves around structural factors that could overwhelm productivity gains and housing disinflation. Researchers identify multiple inflation catalysts: Trump-era tariffs that importers will progressively pass to consumers, tighter labor markets driving wage growth, possible migrant deportations exacerbating worker scarcity, and substantial fiscal deficits approaching 7% of GDP. Each factor individually poses inflationary pressure; combined, they create a cost push inflation environment that central bankers cannot easily dismiss.

Tariffs and Labor Tightness Fuel Cost Push Inflation Risks

The tariff mechanism deserves particular attention. When import duties rise, companies initially absorb costs but gradually shift them to end consumers. Posen and Orszag project that “by mid-2026, the delayed pass-through should be substantially complete. This could add 50 basis points to headline inflation by mid-year.” This cost pass-through represents textbook cost push inflation—price increases driven by rising input costs rather than excess demand.

Labor market dynamics reinforce this pressure. Reduced immigration tightens workforces in migrant-dependent sectors, pushing wages higher and triggering demand-pull effects. Combined with easier financial conditions and unanchored inflation expectations, these forces compound the cost push inflation challenge. “We believe these factors outweigh the downward-pressure trends that consensus has been fixated on,” the economists noted, referring to housing deflation and AI productivity gains.

Fed Rate Cuts May Face Headwinds from Persistent Price Pressures

Higher inflation directly constrains Federal Reserve policy flexibility. Markets and crypto investors have priced in aggressive rate cuts—with investment banks forecasting 50-75 basis points of cuts in 2026. Yet persistent cost push inflation would force the Fed to proceed cautiously, disappointing those expecting rapid monetary easing. As analysts at Bitunix observed, the real policy risk lies “not [in] easing too early, but remaining overly cautious after structural disinflation has taken hold—ultimately forcing a more abrupt and disruptive adjustment later.”

This policy dilemma materializes as Treasury yields climb. The 10-year yield hit 4.31% earlier this week, tracking Japanese government bonds to record highs. Rising yields make risky assets less attractive, creating immediate headwinds for equity and crypto markets alike.

Bitcoin and Crypto Assets Retreat as Real Yields Climb

The market reaction has been swift. Bitcoin has dropped to $84.40K as of January 29, 2026—a 5.89% decline over 24 hours—as investors reassess assumptions about interest rates and real returns. XRP similarly retreated, falling 5.47% to $1.81 on the same date, as high-beta tokens sold off alongside the broader risk-off sentiment triggered by inflation concerns and rising yields.

The technical picture reflects growing unease. Traders now scrutinize critical support levels and position for potential deeper declines should inflation data continue surprising to the upside. The crypto rally that thrived on disinflation expectations faces a fundamental challenge: sustained cost push inflation, if realized, would keep borrowing costs elevated and dampen the very conditions that fueled recent gains.

For investors who positioned themselves around a disinflationary 2026, the Peterson Institute-Lazard analysis serves as a sobering reminder. Cost push inflation mechanisms—rooted in tariffs, labor scarcity, and fiscal expansion—operate through different channels than demand-pull inflation but prove equally potent in constraining monetary accommodation. Bitcoin bulls may need to recalibrate expectations as the cost push inflation narrative gains traction in policy circles.