Consumer price index is a measure of inflation in the economy.
This index uses market price changes and shows inflation trends in different countries such as the United States. Of course, inflation can affect market psychology and thus asset prices in different ways. Hence, this data is also very valuable for traditional stock investors.
But the main question is, what is the relationship between digital currency price fluctuations and the CPI index?
There is a proven correlation between inflation and stock prices, and this connection also applies to the crypto market.
So, let’s see what CPI is, how it works and what is its importance in the cryptocurrency market?
In this article we will cover:
- What is CPI?
- How to calculate CPI?
- Importance of CPI data in traditional financial markets
- What is the relationship between the digital currency market and the CPI?
- What does comparing CPI to cryptocurrency volatility tell us?
What is CPI?
CPI includes details of market inflation statistics that are updated monthly. CPI is the weighted average of a basket of goods.
To put it more simply, CPI is an index that tracks the price of a basket of assets and gives us an insight into different parts of the market.
This basket represents spending patterns for common consumer goods.
For example, in the last two years, the American CPI number has increased from 265 in 2021 to more than 300, which shows a monthly growth rate of 0.5%.
This exponential growth rate compared to the previous years shows that the average price of the basket of basic goods has increased sharply in the last two years.
Overall, the CPI number is effective in analyzing the cost of living and consumer purchasing power. When the CPI number is too high, it is a sign of declining living standards.
CPI also allows people to analyze past market trends and predict major trends. Past data and CPI history can be used to analyze and predict future trends. CPI indicates that we should prepare for rising inflation or think about developing an investment strategy.
In the United States, the Bureau of Labor Statistics (BLS) measures changes in consumer prices. The BLS publishes two indicators each month:
- CPI-U, which is an index of urban consumers
- CPI-W, which is the index of hourly work jobs
The CPI-U index covers more than 90% and the CPI-W covers almost 30% of US citizens.
Together, these two account for more than 90% of the spending of the entire US population. The U.S. CPI uses more than 94,000 prices to collect data, so it even covers the increase or decrease in rent prices in the U.S., which covers more than 43,000 housing units.
For this reason, this index is one of the most popular measures of inflation in the American economy.
How to calculate CPI?
If we want to calculate the CPI per year, we must first consider a base year for comparison.
Then, to calculate the CPI, the cost of the market basket in one year should be divided by the cost of the market basket in the base year and then multiply the result by 100. (The base year is basically determined by the labor department.)
But what is the relationship between inflation and cpi calculation?
To calculate inflation, we calculate the difference between this year’s CPI and last year’s (we subtract this year’s CPI from the previous year’s CPI) and divide it by the base CPI.
CPI(x+1) – CPI(x) / CPI(x) = inflation rate
Here x will be the consumer price index in the base year.
Importance of CPI data in traditional financial markets
Policymakers, brokers and even small business owners use fundamental analysis information such as the CPI index in their decision making.
Inflation is closely related to stock market performance. Therefore, people who are involved in traditional financial markets should pay special attention to CPI data.
But what is the use of the data obtained from the CPI index:
Measuring Consumer Purchasing Power
We all know that a small amount of inflation is necessary for the economy.
According to the decision of the US Federal Reserve, inflation increases by 2% every year. However, when inflation grows too fast, consumers take less risk and spend less.
Therefore, the interest rate will also increase and it will become more difficult to get a loan.
Prediction of stock market trends
High inflation rate slows down businesses. Customers stop buying products or investing in stocks. People withdraw their capital from the market to use it for necessary things or to save their money. This reduces the value of many stocks.
Making specific business decisions
The CPI of some countries, such as the United States, is regionalized. Investors and businesses can view their local market conditions.
Also, CPI has eight main categories including energy, transportation and food. Businesses in these industries can use US CPI data to their advantage when making strategic decisions.
Determine Investment Strategy
CPI allows traders to search the market by industry classification, month/year and even region. This feature allows traders to have a comprehensive view of the market and makes CPI a suitable tool for determining a risk management strategy.
What is the relationship between the digital currency market and the CPI?
A decrease in demand in the stock market can mean a decrease in the price of digital currencies.
Although the crypto market is considered a new financial market compared to the stock market, which is in its infancy, financial experts admit that there is a correlation between the stock market and digital currencies.
Comparing the price volatility of Bitcoin and Nasdaq over the past decade shows that recently Bitcoin has been acting like the Nasdaq.
In the table below, the Bitcoin price trend is compared with the CPI index.
| Date | Consumer Price Index | Crypto market trends | Bitcoin price fluctuation rate |
| December 13, 2022 | 7.1% | Ascending | 3.3% |
| November 10, 2022 | 7.7% | Ascending | 10.7% |
| October 13, 2022 | 8.2% | Steady | 1.17% |
| September 13, 2022 | 8.3% | Descending | -9.9% |
| August 10, 2022 | 8.5% | Ascending | 3.53% |
| July 13, 2022 | 8.1% | Descending | -4.2% |
If crypto is related to stocks, then what is the relationship of crypto market to CPI?
Crypto can be a risky investment. Digital currencies are extremely vulnerable in economic crises.
For example, the Corona epidemic and its surrounding issues caused extreme fluctuations in the price of crypto.
In fact, much of the volatility of digital currencies is due to its novelty. Digital currencies are decentralized and easily accessible through the internet.
Most digital currencies have a fixed supply. For this reason, some experts believe that crypto can become an effective hedge against inflation in the future.
For this reason, digital currencies can be used to store long-term value. On the other hand, many cryptocurrencies pay dividends to investors who have staked their currencies.
Even as interest rates on traditional loans rise, crypto lending platforms reward unique rates. This makes traders with small capitals turn to digital currencies.
Certain categories of the traditional stock market, such as energy and food, are more closely related to crypto.
These categories include essential items. If the price of essential items such as energy carriers and food increases, people will have less extra income to spend on other uses such as digital currencies.
In this way, we can compare the value of digital currencies like Bitcoin with the US CPI.
What does comparing CPI to cryptocurrency volatility tell us?
Using the CPI as an indicator, we can make informed predictions about the risk or reward of investing in crypto.
We can use CPI and its subsets to determine the volatility of the crypto market. If the CPI rises and falls at a significant rate and an exponential slope, it can be a sign of cryptocurrency market volatility.
In general, experts believe that the higher the CPI index, the more pressure will be placed on digital currencies. However, an increase in CPI does not mean that your cryptocurrency trading will necessarily result in a loss.
What do you think is the main use of CPI? Can the use of CPI benefit day traders who use short-term strategies to make profits?
In this way, traders can use the volatility to their advantage instead of waiting for a long time for their crypto to increase in value. This strategy includes very detailed tracking of the CPI trend and technical analysis.
Note that a momentary increase in inflation will decrease the price of crypto. Once the market stabilizes, day traders can sell their cryptocurrencies for a profit.
Finally, comparing CPI data with crypto indices provides valuable market insights for buying digital currency. CPIdetermines whether you should hold your cryptocurrency for the long term or trade it during the day.
A high rate of inflation increases the pressure on commercial assets, including digital currencies. However, rising CPI can present an opportunity for traders to use it to their advantage.
Although this data helps you make an informed decision, ultimately any outcome depends on your decision.