New research: High inflation may overshadow the Bitcoin bull rally and increase the Fed's costs

A new study from the Peterson Institute and Lazard indicates a cautionary outlook for cryptocurrency investors. Not only could inflation reaching 2.7% in 2025 potentially climb to 4% in 2026—posing a hurdle to the expected Federal Reserve rate cuts that boost Bitcoin and other risk assets. The research by Adam Posen and Peter R. Orszag leaves a big question: how will the crypto market fare if the disinflation scenario does not materialize?

This week, Bitcoin dropped nearly 7% toward $77,830 while the 10-year US Treasury yield hit 4.31%—the highest in five months. For investors relying on lower interest rates, the situation is becoming more complicated.

Why is the inflation prediction based on the research reaching 4%?

The Peterson Institute and Lazard identified five key factors that could push prices higher in 2026. First, the Trump administration’s tariff policies will be a major driver. This is not just a simple price change—when import costs rise, retailers absorb the initial increase, but then pass it on to consumers through higher prices.

“By mid-2026, this delay in price pass-through should be nearly complete. It could add about 50 basis points to headline inflation,” explain the researchers.

Second, the labor market is becoming tighter. Expected deportations and stricter immigration policies could create shortages in key sectors, raising wages and causing demand-pull inflation. Third, government spending remains high, potentially pushing the federal deficit above 7% of GDP.

Fourth, looser financial conditions combined with higher government spending create inflationary pressures that are stronger than disinflationary forces. Fifth, productivity gains from AI and ongoing disinflation in housing are not sufficient counterweights to all of this.

“We believe these factors are more significant than the downward pressures discussed by market consensus—namely, the continued decline in housing inflation and increased AI productivity,” the research states.

How does this impact Bitcoin and crypto expectations?

The critical part: higher inflation could prevent aggressive Fed rate cuts. Investment banks forecast 50-75 basis points of rate reductions in 2026, but the crypto community expects deeper cuts. If inflation rises to 4%, that becomes impossible.

An analyst at Bitunix articulated the core risk: “The real policy danger is not the early pivot, but remaining in an overly cautious stance after structural disinflation due to AI productivity—which will lead to a more abrupt and disruptive adjustment later.”

In other words, if the market’s disinflation forecast is wrong, the Fed might wait too long to pivot, then need to cut rates sharply and quickly. This creates volatility for risk assets.

Treasury yields rise, crypto and stocks fall

The global bond market sent a clear signal. The US 10-year Treasury yield reached 4.31% this week, the highest in five months, driven by higher inflation expectations and rising Japanese government bond yields.

Higher yields make risk-free Treasury investments more attractive and reduce appeal for volatile assets like Bitcoin and stocks. The result? Bitcoin fell to $77,830, down 7% from previous levels. The shift from the disinflation narrative to inflation resurgence triggered significant market repositioning.

The key issue for crypto bulls: if inflation remains elevated and the Fed stays cautious, the opportunity cost of holding Bitcoin versus Treasury bonds increases. This is a fundamental headwind, not just speculative or technical.

The bottom line

The new research provides a stark reality check. The crypto community has built a bull case around disinflation and aggressive Fed easing. But if inflation hits 4% and stays there, that scenario becomes wishful thinking.

Investors need to face the possibility that rate cuts will be slower, more limited, and possibly delayed—all due to structural inflation factors beyond the Fed’s control. As long as this research exists, the crypto market must adjust to more bearish interest rate expectations.