How does the CPI affect the stock market? Does it affect bitcoin and other cryptos?
The consumer price index is a measure of inflation in the US and it has been rising at its fastest rate for 40 years. What is its effect on other finance?
Inflation in the US continues to be with the current rate, 9.1 percent, the highest for over 40 years. This contributes to increased prices on many goods with commodities relating to energy the fastest climbing.
While largely independent from government organisations, cryptocurrency prices are still at the whim of investors. Inflation may not have a direct impact but what inflation spells for the national and international economy will do.
The link between stocks, inflation, and interest rates
Inflation is the measure of how much prices are increasing over the space of a year. If the value is high, such as that being seen at present, then central banks are likely to take certain measures to steer inflation toward their target. At present, the Federal Reserve aims for a 2 percent year-on-year inflation gain.
When inflation is as high as it is, the Fed will, and has, raised interest rates. This measure means borrowing money suddenly gets a whole lot more expensive. With the highest interest rates since the 2008 financial crash, businesses are being incentivised to take less financial risks; save money. If this goes the way the Fed is planning, a recession is very likely with thousands of jobs at risk.
Stock markets usually aren’t affected too much by the inflation data, but can be since higher interest rates can cause business activity to slow. Stock markets have already witnessed a bear market, when a market has dropped 20 percent or more from a high for a sustained period of time, and further expected raises will likely force stock prices lower.
What does this mean for cryptocurrency?
A lean investment market will mean lean cryptocurrency investments. What is of particular concern is the cryptocurrency market in and of itself. In comparison to November 2021, crypto values have been plummeting. Record bitcoin highs of nearly $70,000 have given way to prices hovering around the $20,000 dollar mark; some fall.
The entire cryptomarket was worth around $3 trillion when bitcoin was at its peak. With future regulation looming, the year has certainly been a tough one for cryptocurrency.