The Labor Department’s most recent Consumer Price Index (CPI) report showed headline inflation down for the first time since November 2020. Bitcoin’s price did not react kindly to the news, immediately descending to $29,000 before quickly recovering.
Dissecting US Inflation
Per the department’s figures released on Wednesday, CPI increased by 0.3% on a seasonally adjusted basis in April. That’s compared to 1.2% in March, when the US trade war against Russia sent gas prices soaring even faster than in previous months.
By contrast, this month’s gasoline index fell by 6.1%, helping offset index increases in electricity and natural gas. Rather, price increases in shelter, food, new vehicles, and airline fares were the greatest contributors to inflation, with the food at home index alone rising by 1%.
That said, the all-items index less food and energy increased by 0.6% in April, versus just 0.3% in March. This metric, known as “core inflation”, surpassed economists’ expectations of 0.4%.
Nevertheless, April’s annual CPI figure ultimately clocked in at just 8.3% – down from March’s 8.5% number. The stat marks an end to a multi-month streak of record-breaking headline inflation numbers, with March’s figure remaining the highest in over 40 years.
However, the decline may have more to do with April of last year than the present. Headline inflation rose from 2.6% to 4.2% at the time, meaning this month’s report is using higher prices as a 12-month reference point.
Bitcoin’s Inflation Connection
Bitcoin’s price went erratic in response to the bureau’s update. Upon release, the cryptocurrency’s value collapsed from roughly $31,700 down to $29,000 within 20 minutes. It then rebounded back to $31,600 by 13:50 UST, and has since settled at $31,300 at the time of writing.
The primary cryptocurrency is known to have a mixed relationship with inflation. It’s common for its price to react to monthly inflation updates, though often in unpredictable ways.
On one hand, Bitcoin is thought by some to be “digital gold” – an inflation hedge due to its limited supply of 21 million coins. Conversely, the coin’s price is also tightly correlated to the NASDAQ, seemingly viewed by traders as a risky tech stock.
The latter makes interest rate news play a significant role in the crypto markets as well. Just last week, Bitcoin rose in value after Fed Chairman Jerome Powell ruled out 75 basis point rate hikes, but fell soon after as the market priced in his promise of more increases to come.