2022 results. Record inflation and energy crisis

Introduction

Contrary to expectations, during the crisis that broke out in 2022, the cryptocurrency market did not turn into a “safe haven.” Many crypto enthusiasts hoped that rising inflation would have no effect on cryptocurrencies, and some even predicted that they would skyrocket during this period. However, 2022 demonstrated that cryptocurrencies have a very strong correlation with the stock market: all macroeconomic factors have an impact on cryptocurrencies in a similar manner, and in some circumstances, the reaction is even more significant.

Therefore, it is important to monitor the economic and political situation in the world because these indicators are global and determine the direction of all markets.

Inflation in the world

When analyzing the outcomes of 2022 in the world of cryptocurrencies, it is impossible to avoid pointing out inflation as the primary cause of the extended bearish trend. The outbreak of war in Ukraine and the energy crisis triggered record inflation growth in almost every country around the world, with some economies experiencing triple-digit inflation rates.

Increases in interest rates were made by central banks in an effort to combat rising prices. And this trend may persist through 2023.

The top five countries with the highest inflation rate are Zimbabwe (with an indicator of 269%), Lebanon (162%), Venezuela (156%), Syria (139%), and Sudan (103%).

Energy crisis

The global energy price index, which includes coal, crude oil, propane, and natural gas, has been increasing since October 2020. The war in Ukraine has further aggravated the situation.

European gas prices have surged as much as six-fold since 2021. And electricity prices for households rose by 78%.

Inflation in Europe

European countries also experienced record-breaking inflation in 2022. Both developing and robust economies suffered. And the rise in energy prices is one of the main reasons for this situation.

EU and Eurozone inflation rate

Let's briefly examine the situation in each country.

Germany

Germany experienced 10.4% inflation in October. The rate reached double digits for the first time in 23 years, and this was the highest level in 70 years.

The United Kingdom (UK)

The inflation rate in the UK hit 11.1% in October, the highest level since 1981.

France

France handles inflation better than any other country in Europe. This country has the lowest inflation rate in Europe. During peak levels ​​in October, it reached 6.2%.

ECB key interest rate

The European Central Bank has started raising its key interest rate for the first time since 2011. In 2022, there were four increases totaling 250 basis points. Currently, the key rate is 2.5%, which is the highest level since 2009.

Inflation in the United States

The US economy is one of the largest in the world. As a result, analysts' attention was focused on the rising US inflation throughout the year, which updated a 40-year high in 2022.

The highest annual inflation rate (9.1%) was recorded in June. Then the decline started, reaching 7.1% in November. 

As a result, food prices continue to rise, as do electricity costs and the prices of other goods and services. The cost of living is actually rising.

Thus, the US Federal Reserve is attempting to counteract the rise in inflation by raising the key interest rate and implementing a policy of quantitative tightening.

The Federal Reserve's interest rate

In order to keep rising prices in the US under control, the Fed raised interest rates seven times in 2022, by a total of 425 bps.

The interest rate set by the Fed is currently between 4.25% and 4.5%, which is the highest level since 2007.

Quantitative tightening policy

According to the Quantitative Tightening (QT) strategy, the Fed's balance sheet began to shrink in 2022, reducing liquidity in the economy.

The graph depicts the rate of decline in the Fed reserve, which fell from $8.965 trillion in April to $8.507 trillion on January 4, 2023.

The Fed plans to eventually achieve an inflation rate of 2% and maximum employment. In order to accomplish this, the regulator intends to stick to its current policy of raising interest rates and shrinking the balance sheet in 2023.

Conclusion

Almost all countries saw a slight decline in inflation rates by the end of 2022, but central banks may continue their current course of action through 2023 in order to keep inflation at the desired levels.

For regulators, lowering inflation is a top priority. And until they abandon their hawkish stance, financial markets (including crypto) will keep falling.