Crypto prices have maintained a strong correlation with most macroeconomic factors. It is no longer debatable that inflation affects the trend of the crypto market. Most previous declines in digital assets took root from the swing in the general global economy.
The intensity of the crypto winter through the first half of the year had accumulated strength from potential inflation. However, due to the suspicions of rising inflation in the economy, crypto prices have shown signs of slowing down. The latest CPI data has even pushed the market into another red region.
The consumer price index (CPI) is an economic indicator which measurements inflation through movement of the costs of goods and services. The percentage increase in the CPI over a given period gives the economy’s inflation rate for the given time.
However, the report for July provided a slight relief as the CPI indicated almost zero impact on inflation. With the positive significance of July’s information on the crypto industry, many hopes were raised. Many participants expect a more favorable result for August, but expectations have been dashed.
CPI data falls below crypto community expectations
Finally, August’s released CPI report contradicts the expectations of the crypto space. The result revealed a change of 0.1% MoM and an 8.3% YoY change, indicating an incorrect value for the industry. The crypto market had estimated CPI at -0.1% MoM and 8.1% YoY. In addition, against the expected core CPI of 6.1%, the real value is a 6.3% annual increase.
With the outcome of the CPI data, prices in the crypto market have started to fall. Bitcoin and Ethereum are taking the news badly as BTC and ETH have plunged.
The action of crypto assets over the CPI data is not surprising. This is due to the impact of inflation on cryptocurrency volatility. While conducting monetary policy, the Federal Reserve always considers the CPI.
Currently, the Fed uses a hawkish approach as a control measure over US inflation. But according to Fed Chairman Jerome Powell, the Fed’s stance on controlling inflation will cause pain for businesses and households alike.
A potential interest rate increase could affect the market
Seeing the CPI data getting worse means more aggressive easing by the Fed. A better report would have eased the tightening measures of the Fed. According to the CME Fed Watch tool, the Fed could impose a rate hike of around 75 bps. Such a price increase is a sad story for crypto asset prices.
As hopes fade for a potential rescue in the crypto market, some hands are pointing to the Ethereum upgrade. The merger is promising in the industry and may facilitate a price rise in the future.
But many traders have no confidence that the upgrade will succeed. Therefore, the crypto market could not have a practical savior.
Featured image from CNBC, chart from TradingView.com