CPI stands for Consumer Price Index.

It tracks how the prices of goods and services are changing.

Also, it reveals the overall cost of living and the purchasing power of a currency.

The CPI is calculated by comparing how much a basket of goods and services costs today to how much it cost in the past.

The basket includes things that people usually buy, like food, housing, and transportation. 

If the cost of the basket goes up, it means that the cost of living is going up.

Imagine you’re at the store with money to buy needed items. This money is like your “buying power.”

If CPI has gone up, it means that the average prices of the things you usually buy are increasing.

So, your money might not be able to buy as much as it used to.

But how do you know what the CPI is?

You will find out in the next section.

How Do I Know What The CPI Is?

CPI is released in over 180 countries by their governments’ statistical agencies.

It can be done at different intervals, such as monthly or quarterly, to provide timely information about the current inflation and economic growth levels.

In the United States, for example, the CPI is released by the Bureau of Labor Statistics (BLS) monthly.

Their CPI report for July showed an increase of 2.0%, exactly the same as of June 2023.

However, looking at it over a 12-month span, it increased by 3.2% in July from 3.0% in June, which is a 0.2% increase.

This means that inflation is on the rise.

Image source – https://nypost.com/2023/08/10/cpi-rose-3-2-in-july-amid-feds-battle-to-cool-inflation/

Now, here is where it gets interesting.

When the CPI becomes too high, the Feds (that’s the US central bank) increase interest rates to control inflation and make sure that things don’t get too expensive.

On the other hand, if the CPI is low, the government doesn’t rush to do much because the cost of living is still affordable for most people.

In addition, the inflation rate, as measured by the CPI, can significantly affect cryptocurrencies and stocks because it can influence their demands and, in turn, their value.

So, over to the big question: how does CPI affect cryptocurrencies and stocks?

I talked about that in the next section.

How Does CPI Affect Cryptocurrencies and Stocks?

Let’s start with Cryptocurrencies.

Cryptocurrencies

When the CPI is high, it shows that the purchasing power of money has decreased. 

This means that people need more money to buy the same quantity of goods and services. 

As a result, investors may liquidate their assets in cryptocurrencies to afford these goods and services or to maintain their standard of living.

This action could lead to lower demand for cryptocurrencies, causing their values to drop.

However, on the bright side, some investors view cryptocurrencies like Bitcoin and Ethereum as safe-haven assets or stores of value.

Take Bitcoin, for example; its limited supply protects it from inflation that impacts regular money or fiat.

Moreover, many believe cryptocurrencies like Ethereum and Bitcoin could become more valuable over time.

In other words, if the CPI increases, some investors turn to cryptocurrencies as a hedge against the devaluing fiat currency.

Still, on the bright side, this increased demand for cryptocurrencies can drive up their prices.

Let’s see how it affects Stocks next.

Stocks

Think of stocks as having a share in a company.

When the CPI is high, it means that the prices of goods have gone up.

This indicates that companies will spend more money to manufacture their products.

If companies’ costs go up, it could affect their profit margin, or in more severe cases, they might even incur a loss.

This could lead to a decrease in the company’s stock price, which would mean a loss for investors.

In addition, when there is a high CPI and interest rate increases, it becomes more expensive for businesses to borrow money.

Since the cost of borrowing and spending is high, it discourages companies from borrowing money to invest in their business and expand.

This can potentially lead to a decrease in business and companies’ stocks.

On the bright side, some companies might be able to handle higher costs better or even raise their own prices, which could keep their stock prices steady or make them go up.

Alternatively, a lower CPI means lower inflation, which could lead to lower interest rates and economic growth.

This could make investors more optimistic about the future and become enthusiastic about buying risky assets like crypto and stocks, pushing up their prices.

So, the release of the CPI can have a significant impact on the market.

That’s why when the CPI release is coming close, there is usually high volatility in the market resulting from speculations, as investors are often uncertain about how it will affect the market.

But what is suitable for the market – a high CPI or a low one?

Find out below.

Which CPI Is The Best – High CPI or Low CPI?

In general, a lower Consumer Price Index (CPI) is considered better for the market, as it indicates lower inflation.

Here’s why:

i. Price Stability

A lower CPI suggests that prices for goods and services are relatively stable, which benefits consumers and businesses.

When prices are stable, people can plan their spending and investments more effectively.

ii. Purchasing Power

Lower inflation helps preserve the purchasing power of a currency.

When inflation is high (indicated by a higher CPI), the value of money decreases over time, and consumers can buy less with the same amount of money.

iii. Investor Confidence

Lower inflation is generally seen as a sign of a stable and well-managed economy, which can boost investors’ confidence.

Investors are likelier to put their money into assets like stocks and bonds when they expect stable prices.

iv. Central Bank Control

Central banks often target a specific inflation rate as part of their monetary policy.

They aim to keep inflation within a certain range, typically around 2% in many developed countries.

A lower CPI allows central banks more flexibility in their policy decisions.

However, it’s important to note that extremely low inflation (or deflation) can also be problematic, as it may lead to decreased consumer spending and business investments.

A healthy economy typically has moderate inflation, as it can encourage spending and investment.

Ultimately, what’s “good” for the market depends on the specific economic conditions and the goals of policymakers.

Central banks aim to balance too much inflation and too little, seeking to maintain price stability and support economic growth.

Conclusion

Here, we draw the curtains on today’s post. Hope you enjoy every bit of it.

Let me get your comments and questions in the box below.

If you want to learn how to trade cryptocurrencies and learn more about crypto and DeFi, then, create a Bybit account and join our Telegram group.  

I will see you in the group and the next post.