Inflation Threats Batter Disinflation Expectations, Bitcoin and Risk Assets Depressed

The latest economic projections present disappointing news for crypto bulls. Research from Adam Posen, President of the Peterson Institute for International Economics, and Peter R. Orszag, CEO of Lazard, projects that U.S. consumer inflation could surpass 4% in 2026. This finding directly threatens the disinflation narrative that has been the main justification for market optimism throughout 2025.

The disinflation expectations promoted by the Bitcoin community and risk asset investors are based on the assumption that the Federal Reserve will aggressively cut interest rates. However, higher inflation forecasts alter this calculus. If consumer prices continue to rise, the U.S. central bank will be forced to adopt a more conservative stance, disappointing those relying on monetary policy easing to drive market rallies.

Posen-Orszag Study: Inflation Will Exceed Disinflation Expectations

According to these two leading researchers, several catalysts could push inflation to unexpected levels. First, Trump’s tariffs on imports are expected to be transmitted to end consumers with a lag of several months. By mid-2026, this delay is projected to be substantially resolved and could add up to 50 basis points to core inflation. This means that the combination of commercial tariffs and tighter labor market expectations will create a more resilient inflationary environment.

Additionally, immigration deportation policies are indicated to further tighten the labor market, with shortages of workers in sectors dependent on immigrants. As a result, wages will be pressured upward, creating a demand-driven inflation spiral. The U.S. fiscal deficit, projected to breach 7% of GDP, and increasingly loose financial conditions also add upward pressure on prices.

In Posen and Orszag’s estimates, these inflation-driving factors are more dominant than the market’s favored slowdown trends—namely, the continuous decline in housing inflation and productivity surges from artificial intelligence. The market’s assumptions about a structural disinflation foundation turn out to be less difficult than expected when macroeconomic inflationary forces remain massive.

Implications for Interest Rates and Market Expectations

Higher inflation will pose a dilemma for the Federal Reserve. If consumer prices keep rising, the central bank will find it difficult to justify aggressive rate cuts. The market currently anticipates the Fed will cut interest rates by 50 to 75 basis points throughout 2026. However, crypto bulls even expect more progressive steps.

Analysis from the Bitunix team captures this dynamic precisely: the main risk is not an overly early easing policy, but remaining too hawkish after the structural disinflation from AI productivity begins to take effect. This could force the Federal Reserve to make more abrupt adjustments later on. That’s why markets are starting to consider a “policy chase” scenario, where the Fed lags far behind the curve and must act more dramatically to catch up with missed inflation.

Government Bonds and Pressure on Risk Assets

The higher inflation projections have already begun to be reflected in global bond markets. The 10-year U.S. Treasury yield reached a five-month high of 4.31% earlier this week. The rise in government bond yields across various regions, including Japan, is also adding pressure on risk assets.

Bitcoin responded with a decline. Data shows BTC dropped nearly 4% to the $90,000 level last week. Entering the latest period, Bitcoin is trading at $78.20K with a 7.06% decrease in the last 24 hours. This pressure reflects a capital rotation from risk assets toward higher-yielding financial instruments, as bond yields increase.

The mechanism is straightforward: when government bonds offer more attractive returns with no risk, investors reevaluate allocations away from stocks and more volatile cryptos. Especially for those using leverage to buy risk assets, rising rates can trigger liquidations and additional selling pressure.

Disinflation Expectation Crisis and Its Impact on Crypto

What is happening now is the collapse of a highly trusted market narrative. Throughout 2025, crypto investors built the story that the world was moving toward permanent disinflation thanks to AI productivity and housing normalization. This thesis formed the bullish foundation for Bitcoin and other risk assets. However, Posen-Orszag’s research shows that macro inflationary pressures are still far from gone.

If inflation indeed rises to 4% or higher in 2026, that narrative will be proven premature. The Federal Reserve will adopt a much more hawkish stance in managing long-term inflation expectations. Unanticipated interest rate stability will become a constant headwind for risk asset valuations. Up to this point, market expectations of disinflation conditions will need to be fundamentally recalibrated.

The crypto community and risk asset investors now need to adjust their strategies to a scenario of persistent inflation, rather than assuming ongoing disinflation. The success of Bitcoin and other risk assets in this environment depends on whether they can find intrinsic value outside of expectations of rate cuts—a much more challenging environment than a bullish journey under the shadow of disinflation.