Inflation is a sustained increase in the overall price level of goods and services, a process of currency devaluation, and a decline in purchasing power. This process is associated with traditional markets but also impacts the cryptocurrency market.
Some investors view digital assets like Bitcoin as a 'safe haven' for preserving capital. Others, conversely, consider them too volatile and risky, making them unsuitable for use in challenging economic conditions.
One of the indicators used to assess inflation is the Consumer Price Index.
What is the Consumer Price Index?
The Consumer Price Index (CPI) is an index that measures the gradual change in the overall price level of goods and services that a specific group of the population purchases and uses. It reflects inflation or deflation in the economy — monetary regulators often rely on this metric for decisions affecting monetary policy and financial stability.
In the United States, the index is calculated by the Bureau of Labor Statistics (BLS). To do this, the agency collects data from retail and service enterprises.
Types and categories of CPI
Monthly, the BLS publishes two metrics:
Consumer Price Index for urban consumers (CPI-U);
Consumer Price Index for urban wage earners and clerks (CPI-W).
CPI-U is considered more comprehensive — it covers 93% of the U.S. population. The index also includes unemployed individuals and retirees, but does not account for the expenses of citizens living in remote rural areas or military bases. The metric is the most representative indicator of changes in consumer prices, making it the most cited.
CPI-W is focused on households where more than half of the income comes from wage earners and clerks. The index covers about a third of the U.S. population and is primarily used for adjusting social security payments and other federal programs.
CPI is also divided into several main categories, each reflecting a specific sector of consumer expenditures. These categories include:
food — covers expenses for food and beverages, including in establishments such as restaurants and cafes;
housing — covers rent, mortgage payments, property maintenance, and other household expenses;
clothing — includes clothing, footwear, and related services;
transportation — includes the purchase of cars, public transportation expenses, fuel, and maintenance;
healthcare — covers health insurance and services, as well as medications;
education and communication — includes education fees, telephone services, and internet;
entertainment — covers various forms of recreation such as television and video games.
Each category is weighted according to its significance and impact on the average consumer's budget, making CPI a nuanced tool for understanding inflation.
How is CPI calculated?
The calculation of CPI involves collecting data on prices paid by consumers for a specific basket of goods and services and comparing them to similar values from a previous period. These data are then weighted and normalized to create the index.
The indicator is expressed as a percentage and can be calculated for a specific month or year.
Criticism of CPI calculation methodology
Although CPI is a fairly important indicator, the metric is criticized for its accuracy in reflecting true changes in the cost of living.
Some note that the index cannot fully account for consumer shifts to cheaper alternatives when prices rise for certain categories of goods. There are also difficulties in measuring improvements in the quality of goods and services, which can distort the actual price changes.
CPI has issues with including new products in the basket. This can also make inflation metrics inaccurate.
Since the traditional calculation of CPI-U measures inflation only for the urban population, it is a less reliable source of data for people living in rural areas.
Moreover, the index does not clearly indicate how inflation affects different demographic groups. For example, rising education expenses may negatively affect young citizens, while the impact of rising healthcare costs is more strongly felt by another group of people.
Finally, the index is applied to citizens with different income levels, so it may inadequately reflect the individual characteristics of each person.
Why is CPI important for macroeconomics?
The Consumer Price Index serves as a kind of 'barometer of economic health', reflecting consumer purchasing power and confidence.
Central banks use CPI to determine the level of inflation, allowing for decisions in monetary policy. For example, adjusting interest rates. Therefore, the metric directly affects many areas of activity, including lending and investments.
With the Consumer Price Index, wages, pensions, and social security payments are adjusted to make them consistent with the level of inflation. This supports the purchasing power of citizens.
How does Bitcoin respond to inflation data?
The Consumer Price Index is seen as a measure of inflation. When CPI reaches high values, fiat currencies like the U.S. dollar lose their purchasing power.
As mentioned above, some consider Bitcoin to be a 'safe haven' for capital. Therefore, a rise in CPI could theoretically contribute to an increase in the quotes of the first cryptocurrency — it may serve as a store of value not directly tied to the economic policy of any particular country.
However, in practice, the correlation between CPI and Bitcoin price is not always positive and straightforward. The digital asset market is characterized by its volatility. It is influenced by a whole range of different factors, including participant sentiment, technological innovations, regulatory actions, and the macroeconomic situation.
For example, a high CPI may attract investors' attention to Bitcoin. However, if this occurs against a backdrop of regulatory restrictions affecting the industry, the expected price increase may not happen.
The rest of the cryptocurrency market also reacts to the publication of the index. Altcoins may follow the flagship or respond independently of it, according to specific use cases and investor sentiment.
For example, quotes of privacy-oriented digital assets may show weak correlation with CPI. Meanwhile, the prices of tokens related to the RWA sector or income-generating products may attract increased interest from users seeking to preserve capital.
What other macroeconomic indicators affect the value of cryptocurrencies?
The cryptocurrency market is still relatively young. It is heavily reliant on speculation, which makes its reaction to traditional indicators like CPI less predictable. However, macroeconomic indicators still have an impact on it.
In addition to inflation data, digital asset quotes indirectly depend on the decisions of central banks, such as changes in interest rates or the initiation of quantitative easing programs. For example, a decrease in interest rates often leads to an increase in investments in high-risk assets, including Bitcoin.
Global events such as crises and wars can cause instability in financial markets, including the cryptocurrency market.
The quotes of digital assets are also influenced by the policies of regulators in different countries. Strict bans from the regulatory authorities of large economies can lead to price declines. Conversely, liberal policies may stimulate growth.
Fluctuations in fiat currency exchange rates also impact digital assets. A strong national currency may decrease their attractiveness as an alternative investment, while a weak one may only increase demand.
Conclusions
The Consumer Price Index reflects the level of inflation or deflation in the economy. The metric is used by monetary regulators to make decisions that affect monetary policy.
CPI impacts financial markets, including the cryptocurrency market, albeit to a lesser extent. Investors need to monitor the indicators and take them into account when developing strategies. At the same time, they should remember that this is not the only factor determining price movements.
As the cryptocurrency market 'matures', it may begin to show more consistent reactions to traditional economic indicators.
CPI is an index that measures the gradual change in the overall price level of goods and services that a specific group of the population purchases, uses, or pays for consumption.
The Consumer Price Index serves as a kind of 'barometer of economic health', reflecting consumer purchasing power and confidence. Central banks use CPI to determine the level of inflation, allowing for decisions in monetary policy.
Some consider Bitcoin to be a 'safe haven' for capital, so a rise in CPI could theoretically contribute to an increase in the quotes of the first cryptocurrency.
In addition to inflation data, digital asset quotes also depend on the actions of central banks and other regulators, global events such as crises, and fluctuations in fiat currency exchange rates.