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Sharlife is a Registered Shariah Advisory Firm with Securities Commission Malaysia - The only regulated provider of crypto & stocks Shariah status
The United States recently released its Consumer Price Index (CPI) data for February. The data showed a 0.2% increase in inflation, bringing the inflation rate to 2.8%. The increase in inflation has caused significant movements in the cryptocurrency market such as Bitcoin, XRP, Dogecoin and several other coins as a sign of reaction to the CPI report.
Source: CoinMarketCap
The US inflation rate of 2.8% for February was modest compared to its recent high. Although it rose, it was still below expectations of 0.3% and down from 0.5% in January. This brought annual inflation to 2.8% compared to estimates of 2.9% and 3.0% in January. The core CPU increase of 0.2% in February, causing it to miss the estimate of 0.3% to bring the annual figure to 3.1% compared to the expected 3.2%
Source: U.S Bureau of Labor Statistic via FRED
Based on this data, it was enough to move the financial markets as cryptocurrencies reacted positively to this news. A few days ago, the price of Bitcoin increased by 2% in the last 24 hours, reaching up to $82,000 on the day after experiencing an initial decline earlier this week. Not only Bitcoin but also several other coins also responded positively. This is because it strengthens the interpretation that the Federal Reserve will lower interest rates in mid-2025.
The price of this crypto has increased due to inflation. The Consumer Price Index has increased, reflecting the high inflation rate, causing the value of the fiat currency, USD, to decrease. Therefore, some investors will look for other alternatives as "safe havens" such as Bitcoin and gold to maintain the value of their assets. Meanwhile, if the CPI shows a declining chart, then confidence in this fiat currency will increase, causing people to be less interested in crypto as a hedging asset. This is due to the more volatile crypto market and not a stable hedging asset, so people will prefer assets such as gold and real estate.
At the same time, there are predictions that the CPI for March will remain high due to a slight decrease. However, if this trend remains in cooling mode, the Federal Reserve will take the next step on interest rates. This situation will affect the broader market including cryptocurrencies.
With inflation on the rise, investors are closely watching the Federal Reserve's policy announcements regarding interest rates. The Federal Reserve has previously signaled that it will tighten monetary policy, with many expecting a rate cut in 2025. The central bank's shift in stance could have a chilling effect on the broader market, including the cryptocurrency sector.
Since December 2024, the market price of cryptocurrencies has experienced a 30% decline in total market capitalization. This is because tighter monetary policy will reduce liquidity and investors will begin to shift to less risky assets such as gold, the price of which has recently surged.
This situation occurs because, when inflation is high, central banks will raise interest rates to control inflation. This causes investors to withdraw capital from speculative assets such as crypto to safer assets. Conversely, if inflation is low or economic conditions are poor, central banks may lower interest rates, causing more investors to shift to high-risk assets such as crypto.
Apart from interest rates set by central banks such as the Federal Reserve, trade policy also has an impact on market conditions. This situation can be seen in how the market interacts after the new tariffs announced by President of US, Trump on China, Canada and Mexico which could face inflationary effects but it depends on how businesses and consumers adapt to this policy.
The United State Consumer Price Index (CPI) data this time is the first to illustrate the full impact of this trade measure. This situation could increase pressure on inflation or confirm a continued cooling trend. Furthermore, this could make the implications of this policy affect the Federal Reserve's decisions and thus affect market sentiment including crypto. Therefore, some market analysts are very concerned that this trade policy will lead to global economic instability, so investors will prefer safer assets such as gold instead of crypto. However, if the inflationary pressure from this trade policy is not severe, then continued inflation cooling will occur and support the prospect of price increases for risky assets such as Bitcoin, altcoins and several other cryptocurrencies.
In conclusion, the Consumer Price Index (CPI) can affect crypto prices through inflation and deflation, monetary policy, and trade policy. This will influence investors’ decisions on which assets are suitable and safe. If the CPI continues to rise, some investors may look to Bitcoin and other digital assets as alternatives, but long-term stability will still depend on other factors such as global acceptance and government regulation.
