Bitcoin and other cryptocurrencies have rapidly gained traction as the inflation rate in the United States hits its highest level in decades. Bitcoin’s rise has been driven by growing demand from institutional investors, many of whom believe the crypto-asset is a better store of value than traditional fiat currencies.
Also, buyers are driving up market prices with their optimistic predictions about the future of digital assets. With its increasingly massive adoption, Bitcoin and other cryptocurrencies could well become a viable alternative to traditional currency systems.
The financial markets were particularly agitated following the announcement by the Bureau of Labor Statistics of the CPI figures in the United States. CPI figures can have a very significant impact on prices in the crypto sector. Typically, a large deviation from the CPI patterns is the source of a massive price movement across the entire market.
With this in mind, it is necessary for investors connected to the crypto ecosystem to fully understand what the CPI numbers are and how these can affect their investments. This in order to manage their portfolios in the best possible way. So, let’s now look at what the CPI numbers are.
What is the US Consumer Price Index (CPI)?
The US Consumer Price Index (CPI) is an economic indicator that aims to measure the average price change over time on a selection of goods and services. Also, it is used to measure the rate of inflation in the United States, as well as to assess fluctuations in purchasing power.
The calculation of the CPI index takes into account a series of factors such as variations in the prices of food, housing, transport, medical care and much more. By tracking CPI numbers over time, economists can identify trends in consumer habits and make predictions about future inflation rates.
When it comes to investing, understanding how the US Consumer Price Index works is key to making the best decisions possible.
How changes in the CPI index impact crypto market prices?
Changes in the CPI index can have both a negative and a positive impact on the prices of the cryptocurrency market.
Inflationary pressure from a high CPI index can lead to an increase in demand for crypto-assets as investors look for investments that can withstand inflation.
While a deflationary trend coming from a low CPI index suggests a decline in aggregate demand and consequently an increase in crypto market price volatility.
Inflation in the United States is expected to have fallen for the sixth consecutive month, to 6.5% in December 2022 (from 7.1% in November), the lowest level since October 2021. After increasing for four consecutive months, and after posting a 0.1% increase in November, the CPI should stabilize over the next few months.
Core inflation is expected to fall to 5.7% pa, its lowest level in a year, but monthly core inflation is expected to rise at a slightly faster pace of 0.3% from 0.2% in November.
While the inflation rate of 9.1% for the month of June 2022 represents a historic high, it nevertheless indicates a general increase in the level of prices, in particular in the service sector, moreover it is more than three times higher than the Fed’s 2% target.
Bitcoin Price Prediction: The Impact of CPI
Now that we have explained the concept of CPI and its implications, it is easy to understand how it affects the cryptocurrency market. We can now anticipate two possible outcomes of the CPI indices that have recently been released.
If the CPI figures exceed analysts’ expectations of 6.5%, prices in the cryptocurrency market could be higher. Bitcoin in particular could benefit from a very significant advance, breaching an immediate double-top resistance level of $18,250 and aiming for the next resistance level of $19,000 or $19,450.
At the same time, lower-than-expected CPI figures of 6.5% could trigger a sell-off in the market and push Bitcoin towards the $17,500 support zone.