Preface

As the top two cryptocurrencies by market capitalization, BTC and ETH, move towards the US fund trading market, their price increases are increasingly influenced by US macroeconomic indicators. CPI and PPI are two important indicators of inflation. How are they defined, and how do they affect the crypto market?

What is the Consumer Price Index (CPI)?

The Consumer Price Index, abbreviated as CPI, is a measure of price changes for goods and services related to residents’ lives, reflecting the price changes that consumers pay for a basket of goods and services. It is often used as an important indicator to observe inflation levels. The comparison of this data with previous values directly shows the overall economic situation and affects the fluctuations of the US dollar index. Most importantly, changes in the CPI index also determine the Federal Reserve’s macroeconomic adjustment policies for the US economy, such as raising interest rates, pausing rate hikes, or cutting interest rates. The CPI is usually published in the first half of the following month.

What is the Producer Price Index (PPI)?

The Producer Price Index, abbreviated as PPI, measures the trend and degree of changes in the prices of industrial enterprises’ products at the factory gate. It is an important economic indicator reflecting price changes in the production field during a certain period. This data is also regarded as an important indicator for measuring inflation levels. The US PPI index is typically released by the Bureau of Labor Statistics (BLS), and it is updated very frequently, usually in the middle of each month.

The Relationship Between CPI and PPI

Both CPI and PPI can be used to measure inflation. However, CPI is derived from the buyer’s perspective, based on the consumer group, while PPI is observed from the seller’s perspective, representing the producer group. This is the fundamental difference between the two.
Usually, PPI is released earlier than CPI, and CPI data is often referenced based on PPI data. For a business as a producer, increases in raw materials and wages directly lead to higher production costs. When production costs rise, it indirectly indicates a reduction in the profit margin of the business. To cope with the reduced profit margin, the most direct solution for the business is to increase the price of its goods, eventually leading to a rise in CPI.

Impact on the Crypto Market

The release of CPI and PPI data often triggers participants in the crypto market to adjust their positions accordingly. After the data is published, the government must respond and make subsequent decisions to combat rising inflation, as each percentage point can have a significant impact. Before the data is released, the market makes predictions (such as the Cleveland Fed CPI forecast). Higher-than-expected inflation figures may indicate that the government will introduce larger interest rate hikes in subsequent meetings to curb rising inflation, affecting bonds, treasury yields, and more, meaning market participants must rebalance their positions accordingly.
Possible influencing factors include:

1. Inflation Expectations: Higher-than-expected CPI and PPI data may trigger market concerns about escalating inflation, leading to cautious market sentiment. Investors may seek safe-haven assets, and Bitcoin is seen as both a safe-haven asset and an inflation hedge. Crypto-focused investors might adjust their positions for safety considerations.
2. Monetary Policy: Inflation data influences central bank monetary policy decisions. Higher CPI may lead to central banks raising interest rates to control inflation, affecting the liquidity and investment sentiment in the crypto market. Conversely, lower CPI may lead to loose monetary policy, promoting investment in high-risk assets such as cryptocurrencies.
   For example, in February, the US PPI rose 0.6% month-on-month, higher than economists’ expectations of 0.3%. Persistent inflation dampened investors’ hopes for an early rate cut, causing major US stock indices to fall. The crypto market also experienced downward fluctuations, with Bitcoin dropping from nearly $73,800 before the data release to below $69,000, a fall of over 6%.
   Similarly, on June 12, the US Department of Labor released the May CPI index, showing a year-on-year increase of 3.3%, below the Cleveland Fed’s forecast of 3.4%. This news boosted the market, with BTC rising by more than 5% in a short period, and most altcoins experiencing gains of 10%.
   The crypto market is still a niche market, meaning that relatively small portfolio adjustments can lead to more volatility compared to traditional markets. The release of economic data often serves as a market trend indicator, requiring close attention from investors.