If you haven’t noticed by now, Bitcoin’s price is going through some serious short-term volatility on the day that the CPI numbers hit. This is not without a good reason. This is arguably one of the most heavily-discussed metrics in the past few months and one that impacts a number of markets.
Before we see why is Bitcoin going crazy every time the CPI gets published, let’s first take a closer look at what this number represents.
What is the Consumer Price Index (CPI)?
Inflation is the hottest economic topic in the past months, and that’s largely because it’s skyrocketing across the world. Although many warned of high inflation being a direct consequence of the massive money printing that was carried out as means of counteracting the consequences of the COVID pandemic, governments around the world still carried out enormous stimulus packages to assist their distressed economies.
Inflation can be characterized as a general increase in prices and a decrease in the purchasing value of money. So, when governments printed trillions of dollars (or their respective currencies), this led to a decrease in their purchasing power (essentially inflating the existing supply with new supply).
The US economy, which is arguably the world’s leading one, is also experiencing high inflation, and the most common way to gauge it is the Consumer Price Index.
According to the US Bureau of Labor Statistics, the Consumer Price Index (CPI) is:
… a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
To be more precise, some of these goods and services included in the basket are food (at home and away), energy, gasoline, electricity, new vehicles, used cars, apparel, medical care, shelter, transportation services, medical care services, and so forth. Therefore, many experts use it as a common way of gauging the level of inflation, although some argue that the actual levels are higher because not all goods are included in this basket.
As CryptoPotato reported, for the month of June 2022, the CPI clocked in at:
1.3% increase seasonally adjusted (MoM)
9.1% not seasonally adjusted (YoY)
The BBC outlined that May’s inflation (recorded in June) was the highest we’ve seen in 40 years, and the one in June is even higher.
Why Does the CPI Matter for Bitcoin’s Price?
The short answer to this is because it’s a trigger in a way where market participants (read traders and investors) adjust their positions accordingly.
The Bureau of Labor Statistics is publishing these numbers transparently, and we know with certainty when the next such event will happen – typically, it’s between the 10th and the 15th of each month the BLS publishes the numbers for the previous month.
In any case, even though there are projections, the market is generally unaware of what the number will be. And the important thing with inflation is that literally, every percentage makes a serious impact because the governments then have to react and take subsequent decisions to combat the increasing inflation.
So, for example, an inflation number higher than the projections could mean that the government would introduce greater rate hikes in their subsequent meetings to curb the rising inflation – something that has an impact on bonds, treasury yields, deposits, and whatnot – all things that market participants have to account for and rebalance their positions accordingly.
Cryptocurrencies are still a niche market with a total capitalization of less than a trillion, and yet, many institutions and big investors are already involved. This means that a smaller portfolio rebalance relative to that of traditional markets could cause a lot more turbulence.
For instance, on July 13th – when the BLS announced the CPI numbers for June 2022, the price of Bitcoin went through a day where the amplitude exceeded 7% – that’s a lot.
In conclusion, the CPI release date is generally a turbulent event, especially when inflation is at the forefront of all economic discussions. It’s something that market participants use to reposition and adjust their portfolios accordingly, and that’s the principal reason why it causes massive volatility in the relatively small Bitcoin market.