US CPI Data: What is the CPI Effect on Crypto?

Jun 13, 2023
a picture with the text does US CPI data effect your crypto

The CPI (consumer price index) is a measure of inflation in the economy and uses data on market price changes. Indexes like the CPI analyze trends in inflation in the United States. Inflation of course can have varying degrees of impact on asset prices. Hence, this data is useful to traditional stock investors who want to make more informed decisions. However, what is the CPI effect on crypto?

There’s a proven correlation between inflation and the price of stocks - and the same correlation exists with crypto. Understanding how to read US CPI data and compare it to past categories, prices, and years is crucial.

So, let's get started and see how CPI works, its importance in financial markets, and how it affects your investment strategy. 

What is US CPI?

The US CPI details market inflation statistics that updates every month. In the US, the Bureau of Labor Statistics (BLS) measures the changes in consumer market prices. The BLS publishes two indexes per month:

- The CPI-U, which surveys urban consumers,

- and the CPI-W. 

The CPI-U index covers urban consumers, over 90% of the US. The CPI-W surveys the approximate 30% of US citizens who work hourly jobs. The US CPI is the weighted average of a basket of goods. The basket represents US customer spending patterns on common goods. 

The US CPI is also one of the most popular measures of inflation and deflation in the economy. It covers over 90% of the US population’s spending and uses over 94,000 price quotes to gather data.

It also calculates the rise (or fall) in rental prices in the US, covering over 43,000 housing units. Altogether, the CPI is useful in analyzing the cost of living and consumer spending ability. When the CPI is too high, it’s an indication the standard of living is diminishing.

The significance of US CPI data in traditional financial markets

It’s wise to stay updated on the US CPI data. Those involved with traditional financial markets pay especially close attention. Policymakers, brokers, and small business owners use this information in their decision-making because inflation is closely related to stock market performance. 

For example, US CPI data helps with the following:

  • Measuring consumer buying power: A small amount of inflation is healthy for the economy. The US Federal Reserve aims for a 2% increase every year. However, when inflation rises too quickly, consumers spend less and take fewer risks. It also becomes more difficult to borrow money, because interest rates go up. 
  • Predicting stock market trends: Higher inflation rates also cause businesses to slow. Their customers then hesitate to buy their products or invest in their stocks. This decreases the value of many stocks, as people pull their money out en-masse to save it or use it for necessities. 
  • Making specific business decisions: The US CPI is national and region-specific. Investors and businesses alike can view the local conditions of their market. The US CPI allows people to predict major market trends and analyze past trends. It also has eight major categories, including energy, transportation, and food. Businesses belonging to these industries can use the US CPI data to their advantage when making strategic decisions.

A dwindling demand in the stock market can also mean decreased cryptocurrency prices. Cryptocurrency has only been in use a fraction of the time that stocks have. Still, financial experts agree there’s a correlation between the stock and cryptocurrency markets.

Suggested reading: Cryptocurrency and Stock Market Correlation Analysis

Using charts like Trading View, we can compare the highs and lows between Bitcoin and Nasdaq stocks for the past decade. Recently, Bitcoin has traded very similarly to the Nasdaq equities.

CPI effect on crypto

If crypto correlates to stocks, then what is the CPI effect on crypto? During times of economic stress, cryptocurrencies take a hit. Most recently, the pandemic and surrounding issues caused pronounced volatility in crypto prices. Using the CPI as an indicator, we can make informed predictions on the risks or benefits of crypto.

Crypto, like other trading assets, can be a risky investment. We can use the CPI and its subcategories to determine volatility in the crypto market.

Certain categories, like energy and food, are more pertinent to crypto than others. These categories are necessities, and people spend money on energy and food regularly. If their prices rise, people will have much less extra income to spend on crypto - as evidenced in the chart below.  

US Oil Price Chart

Experts suspect that the higher the CPI, the higher the pressure on cryptocurrencies. If the CPI increases and decreases at a significant and quick rate, it’s a sign of volatility in the crypto market. We can compare the value of cryptocurrency, like Bitcoin, to the US CPI.

US CPI exploded out of it's trend in 2021 - effecting crypto prices

As CPI increased in 2023, Bitcoin experienced more volatility

However, a rising CPI doesn’t mean that your crypto trades will result in losses. Some think that crypto is an effective hedge against inflation, or can become one in the future. It’s decentralized, and easily accessible through the Internet, and most cryptos have a steady supply. Much of its volatility stems from its novelty. 

Still, it can be used to store value long-term. Many cryptos even reward investors who hold their stake. 

Even with increased interest rates for traditional loans, there are crypto loan platforms with unique rates. 

This makes it more feasible for traders to turn to crypto, even with a tighter budget. Using the CPI can also benefit day traders who use short-term strategies to turn a profit. Instead of waiting years for your crypto to appreciate in value, traders use volatility to their advantage.

Buy your crypto ‘at the dip’, and sell when it’s increased in price. This strategy includes following the CPI very closely. Take note of when momentary increases in inflation cause decreased crypto prices. When the market stabilizes, day traders can sell their crypto for an attractive profit. 

Conclusion: What does comparing CPI tell us?

Comparing the US CPI data to crypto indexes provides valuable market insights to crypto traders. The US CPI can also be compared to its past data to analyze trends. It's also useful to prepare for inflation or develop an investment strategy that supports your goals.

It can help you determine if you should hold your stake long-term or trade throughout the day. The CPI allows traders to search for specific market insights, by industry category, month/year, and even region. This makes the index valuable for forming a more comprehensive risk management strategy.

A higher inflation rate increases pressure on trade assets, including crypto. An increased CPI can also create an opportunity for traders to use it to their advantage. Whatever you ultimately decide to do is up to you but the data is there to help you make an informed decision.

Disclaimer: “The content should not be construed as investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. It is made available to you for information and/or education purposes only.

You should take independent investment advice from a professional in connection with, or independently research and verify any information that you find in the article and wish to rely upon.”

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