What is CPI?
CPI, or Consumer Price Index, is used to measure prices and inflation. Inflation refers to rising prices, such as a hamburger at a breakfast shop rising from 35 yuan to 55 yuan, or beef noodles rising from 80 yuan to 140 yuan. These are the inflation we can feel in our daily lives, but assessing overall inflation requires more comprehensive data, which is when CPI is used.
CPI calculation:
Assume there are only three kinds of goods: clothes, bread, and toys, with equal weights. The CPI for the base period is 100.
Last year's prices: Clothes $100, bread $80, toys $150
This year's prices: Clothes $110, bread $85, toys $180
This year's CPI = (110 + 85 + 180) / (100 + 80 + 150) * 100 = 113.63
CPI annual growth rate = (113.63 - 100) / 100 = 13.63%
The actual calculation is more complex and involves thousands of commodities, each with its own weighted parameters. An increase in CPI indicates an overall increase in prices.
Other related indicators
- PPI (Producer Price Index): measures the cost of raw materials purchased by producers and is usually a leading indicator of CPI.
- Core CPI: excludes volatile food and energy prices and better reflects long-term trends.
CPI and Cryptocurrency Relationship
Conclusion: Inflation affects interest rate cuts, interest rate cuts affect funds, and funds affect the market, that is, the price of cryptocurrency.
The global massive money printing has led to inflation, and interest rates have begun to rise in order to control inflation.
The COVID-19 pandemic broke out in 2020, and various countries cut interest rates and injected liquidity through QE (quantitative easing), driving up risky assets. This was the background of the last bull market (2020-2021).
However, the massive money printing led to rising inflation. To control inflation, the Fed stopped QE and started raising interest rates. In a high interest rate environment, the cost of funds is high, investment is more cautious, and liquidity decreases.
Impact of interest rates and capital markets
High interest rates lead to:
1. The capital cost of enterprises is high and their willingness to invest is reduced.
2. The attractiveness of venture capital has declined.
3. Market liquidity decreases and trading willingness weakens.
The Fed’s inflation target
FED goal: reduce inflation to 2%. The latest CPI data for June 2024:
- CPI：3%
- Core CPI: 3.3%
Although there is still some distance from the 2% target, the FED may cut interest rates ahead of schedule based on actual conditions as long as inflation is controllable and moving towards the target.
The impact of interest rate cuts on the cryptocurrency market
The cryptocurrency bull market needs funds, and interest rate cuts are a key factor. The past three Bitcoin halvings were in a low interest rate environment, and the current benchmark interest rate is above 5.25%. A low interest rate environment is conducive to the inflow of funds into the crypto market, driving the overall rise. The DeFi track is particularly affected by low interest rates. In a low interest rate environment, DeFi can attract investors more and provide high annualized returns.
Pay attention to key data on interest rate cuts
The Fed evaluates interest rate cuts based on two main factors:
1. Whether inflation is under control and moving towards the 2% target.
2. Whether the real economy is affected by high interest rates.
Employment data (unemployment rate, non-farm payrolls) are also important indicators. Investors need to pay attention to the release time of these data, as the market may fluctuate significantly.
Market expectations and interest rate cuts
Market expectations are a reference for observing interest rate cuts. For example, the market expects that interest rates may be cut by one basis point in September, November, and December 2024, but this is only an expectation, not a FED decision.
The cryptocurrency bull market requires a large amount of capital to enter the market, and the amount of capital in the overall environment is affected by interest rate cuts, which are affected by CPI and employment data. #BTC☀
