Consumer Price Index: Why should investors know about CPI?

Briefly about the essence

The consumer price index measures how prices for goods and services purchased by the average person change. It's not just a number on paper – the CPI affects interest rates, wages, government programs, and, importantly, cryptocurrency markets. If you're investing in bitcoin or altcoins, you should understand how the CPI works.

How does the consumer price index arise?

Let's start with the basics. National statistical agencies (, for example, the Bureau of Labor Statistics in the USA), calculate the CPI in four stages:

Step one: form the “shopping basket”

Statisticians select a representative set of goods and services that people purchase regularly. These include food, clothing, transportation, healthcare, and entertainment. Such a sample should reflect the typical budget of an average household.

Step two: gathering price data

Prices are constantly tracked in various points of sale – from traditional stores to online platforms. It is important to cover different geographical regions to account for local differences.

Step three: weigh the goods

Not all goods are equally important in the budget. If people spend 30% of their income on housing and only 5% on entertainment, then in the calculation of the CPI, housing will be given greater weight. This makes the index adequate to reality.

Step four: calculate the index

Prices are compared to the base period (, which is assigned a value of 100). CPI = 105 means that prices have increased by 5% from the base level. CPI = 95 means prices have decreased by 5%.

What is the real purpose of the ICO?

Inflation is becoming visible

The Consumer Price Index is the main indicator of inflation. When it rises, it means that the purchasing power of money decreases. Politicians, companies, and ordinary people use this data to understand the real state of the economy.

Adjustment of payments for living expenses

Social pensions, scholarships, and some contracts are tied to the CPI. When inflation rises, the amount of payments also increases so that people do not lose purchasing power. This is a cost of living adjustment system (COLA).

Central banks make decisions

If the CPI is rising rapidly, the U.S. Federal Reserve ( or similar institutions in other countries ) may raise interest rates to cool down the economy. Higher rates make loans more expensive, people are less inclined to borrow, spending decreases, and inflation slows down. Conversely, with low inflation, rates may be lowered to stimulate growth.

Protection from inflation through securities

Some government borrowings (TIPS) are indexed to CPI. The investor receives additional payments if inflation rises. This is one way to protect capital.

How ICOs Influence the Behavior of People and Companies

Consumer Expenses

When the CPI rises, people understand that their money is losing value. Some cut back on spending to save for times of poverty. Others, on the contrary, rush to spend money while it is worth more. Companies often see fluctuations in demand because of this.

Salary and disputes

During salary negotiations, unions often refer to the CPI, demanding increases so that workers do not lose purchasing power. Smart employers understand that without adjusting salaries, they will lose their best employees.

State policy is being adapted

Tax rates, social programs, subsidies – many things are adjusted according to the CPI. The government tries to keep these programs effective in real terms, despite inflation.

ISC and cryptocurrency markets: the invisible thread

The connection between the consumer price index and cryptocurrencies is indirect but valid. Here’s how it works:

Cryptocurrency as a hedge

When the stock market is steadily rising, investors become concerned. Fiat currencies lose value. At such times, interest in alternative assets, including Bitcoin and Ethereum, increases. Although cryptocurrencies are volatile, they are seen as a potential hedge against the depreciation of national currencies in the long run.

Monetary policy as a trigger

The CPI influences central bank decisions on interest rates. If data indicates high inflation, banks raise rates. Higher rates make traditional investments like bonds and deposits more attractive, which can put pressure on crypto markets. Conversely, lower rates typically have a positive effect on the appetite for riskier assets, including cryptocurrencies.

Trust in the system

If inflation remains high for years, people lose trust in the traditional monetary system. This creates conditions for the expansion of the use and acceptance of cryptocurrencies as an alternative or complement to fiat money.

Tracking the CPI – an Investor Skill

Understanding the consumer price index is not about memorizing formulas. It's about realizing how the economy actually functions. When new CPI data is released, it often causes fluctuations in financial markets, including cryptocurrency markets. Investors who track these trends have a better understanding of what changes to expect and can make informed decisions about their portfolios.

This is especially important in volatile cryptocurrency markets, where an informed position provides a competitive advantage.