Inflation Rate Reports (CPI) Don't Significantly Affect BTC Price

Having launched in 2009 after the Great Financial Crisis, Bitcoin had few macroeconomic stress tests to withstand. This is in contrast to gold with its rich history throughout the ages and different political systems. 

Yet, gold has a pseudo-limited supply, making its scarcity fluid. New gold veins are found with frequency while Bitcoin has mathematically precise and predictable scarcity, limited to 21 million Bitcoin (BTC). But does that mean that Bitcoin is a superior hedge against inflation than gold?

How Do CPI Announcements Affect Bitcoin Price?

On a daily basis, from the Bitcoin (BTC) open price on the day of the CPI report to the BTC open price the next day, Bitcoin price falls or rises regardless of the direction of the inflation rate shift. For instance, when the CPI report showed a drop from 8.5% to 8.3%  (annualized) between March and April 2022, Bitcoin price dropped -11%. 

Vice versa, Bitcoin's price went up 9.68%, following a CPI report showing an inflation decrease from 8.2% to 7.7% (annualized) between September and October 2022.

In May 2024, when BTC price went up 7.02% a day after the CPI announcement, the report showed a slight decline from 3.5% to 3.4% (annualized). Notably, when there was an inflation spike from 7.5% to 7.9% in the March 2022 report, Bitcoin price actually dropped by 6.37%. 

In other words, the logic assumed regarding the relationship between Bitcoin price and CPI announcements doesn’t manifest in the data. This makes sense once we look at monthly BTC price change and wider drivers that have a greater effect.

Does Bitcoin Go Up or Down With Inflation?

In March 2022, the Fed began its interest rate hiking cycle to curb inflation. Considering the monthly CPI reporting lag, January 2022 will be the starting point for comparison with the monthly price of Bitcoin for two reasons:

• Raised interest rates had a suppressive effect on the economy as borrowing became more expensive. 

• The act itself put inflation in the public spotlight as something that needed to be urgently addressed. Therefore, this would drive Bitcoin’s perception as an inflation hedge even more.

From this data, it is clear that the Fed’s hiking cycle, as a way to shrink its balance sheet, had a far greater (suppressive) effect on the BTC price than CPI figures. In fact, as CPI figures go down, the BTC price tends to go up. This stands to reason when these factors are taken into account:

• Bitcoin is equally perceived as a speculative asset and a currency devaluation hedge. This perception is derived from its limited usage (under 2%) in the economy compared to the ubiquitous dollar.

• Conversely, prior to the Fed’s hiking cycle, when the money was “cheap,” Bitcoin was more likely to receive inflows as a riskier investment. 

• However, as the Fed kept raising interest rates to curb inflation, this was countervailed by Bitcoin’s increasingly limited supply. As of October 2024, 94.13% of Bitcoin supply is available at 0.84% inflation rate, following the fourth halving event in April 2024.

• More so than just inflation hedge, it is fair to say that Bitcoin is a central banking hedge. This was evident when Bitcoin went up 9.5% amid the US regional banking crisis.

In conclusion, the effect of CPI announcements on the price of Bitcoin is diluted compared to the underlying Bitcoin tokenomics. Most importantly, the inflation rate higher than BTC inflation is baked into the central banking cake. This is why even if CPI figures are on a downward trajectory, they don’t detract from the fact that the dollar will continue to be devalued while Bitcoin will have an even lower inflation rate in the future, following the fifth halving in March 2028.

In contrast, it is exceedingly unlikely that the federal government will curb its spending to such a degree as to cause the Federal Reserve to stop monetizing the government’s rising debt. In the near future, it is more likely that the Fed’s rate cuts will once again open capital inflow to Bitcoin, regardless of lower CPI figures.

Why Would Inflation Reports Affect Bitcoin Price?

Rather elusive, inflation is understood as the rise of prices of goods and services, typically measured by government agencies. In the US, this would be the responsibility of the Bureau of Labor Statistics (BLS) via the Consumer Price Index (CPI).

However, delving beneath the surface, inflation is best understood as the effect of the central banking system. Specifically, when the Federal Reserve (“The Fed”) monetizes debt to cover government spending, the central bank increases its securities portfolio. The effect is the increase in the money supply, which manifests as inflation.

After decades of ever-increasing monetary plateaus to monetize debt, the most extreme one happened in 2020. The Federal Reserve’s balance sheet inflated from $4.2 trillion in early 2020 to $7.2 trillion by mid-year. Consequently, inflation (CPI) followed the next year as a lagging effect, having reached a peak of 9.1% (annualized) in June 2022, the highest since 1981.

In other words, the Federal Reserve constantly devalues the USD currency through constant monetary expansion. Even Fed Chair Jerome Powell has difficulty explaining why the base inflation target (the USD value erosion rate) is 2% rather than some other percentage. 

Consequently, this means the following:

• The dollar is a tampered asset with value erosion embedded.

• Bitcoin is an unalterable asset with value secured through decentralization and embedded scarcity.

Theoretically, this would translate to the price of Bitcoin going higher after CPI reports are higher or lower if CPI reports show a decline. However, that has not been the case as studied above.

Methodology

Figures for Consumer Price Index (CPI) were taken from the U.S. Bureau of Labor Statistics. Other data was taken from the Federal Reserve Bank of St. Louis, while Bitcoin (BTC) price and market cap data was taken from CoinGecko, from a January 2022 to October 2024 timeline. Price changes of BTC was then juxtaposed against annualized monthly CPI figures.

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Curious to find out more about our previous research studies & statistics? Check out this one we did on crypto enforcements by regulators in the US.