According to Bureau of Labor Statistics data, the Consumer Price Index for All Urban Consumers (CPI-U) increased 9.1 percent year on year through June. This amount was higher than the 8.8 percent projected by Reuters and Dow Jones polls, and it was the highest level for this 12-month measure of inflation since November 1981. So what is CPI and what does it have to do with the crypto market? Let's find out on <a href="https://www.builder.news/" alt="Builder.news" title="Builder.news" target="_blank" rel="" class="">Builder.news</a>.<h2>What is CPI?</h2>Defined by the US Bureau of Labor Statistics, the Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available.<img src="https://cdn.builder.news/news/11ed07e2416ac83ba8e6023f659fee92.jpg" alt="US CPI in june 2022" title="US CPI in June 2022" width="600" height="512">Economists can determine how prices are rising or declining by averaging out price changes across a basket of various commodities and how this affects the cost of living. Except for Australia and New Zealand, which provide quarterly numbers, most countries update their CPI monthly.For decades, governments have watched consumer prices. According to the financial website Investopedia, the Bureau of Labor Statistics began collecting CPI data in the United States in 1913.Following that, Bureau states its data collectors record the prices of over 80,000 items per month across more than 200 categories. This entails visiting or calling thousands of stores and service providers across the United States, either in person or online.<h2>The link between CPI and inflation</h2>The CPI is one of the most widely used measures for determining inflation and deflation. Inflation is a key measure of the health of an economy. The CPI and other indexes are used by governments and central banks to make economic decisions.The monthly CPI provided by the Bureau of Labor Statistics can then be used to compute inflation for that period by determining differences between two periods.<img src="https://cdn.builder.news/news/11ed07e2416aded1a8e6023f659fee92.jpg" alt="US inflation" title="US inflation" width="600" height="493">To better understand these two notions, let’s do some calculations for the time frame between January 2000 CPI and January 2010 CPI.The January 2000 CPI was 168.800, whereas the January 2010 index was 216.687.To compute, we take the most recent CPI, subtract the oldest CPI, and divide it by the oldest CPI.<img src="https://cdn.builder.news/news/11ed07e2416ae3ffa8e6023f659fee92.jpg" alt="Inflation formula" title="Inflation formula" width="600" height="125">Using our calculations, it would be (216.687 -168.800)/168.800. This comes to 0.2837. Inflation is always expressed as a percentage, so we multiply that figure by 100 to get 28.37%. As a result, the annual inflation rate from January 2000 to January 2010 was 28.37%.<h2>How Fed reacts</h2>Because interest rates are the major instrument used by the Federal Reserve, the United States' central bank, to manage inflation, they tend to move in the same direction. The Federal Reserve Act requires the Fed to foster maximum employment and price stability. Since 2012, the Federal Reserve has set an annual inflation target of 2% as part of its dual mandate to maintain stable prices.When the Federal Reserve raises its benchmark federal funds rate in response to elevated inflation risks, it effectively increases the stock of risk-free reserves in the financial system, restricting the money supply available for the purchase of riskier assets.When a central bank lowers its target interest rate, it effectively expands the money supply available to buy risk assets. Rising interest rates discourage consumer and company expenditure by increasing borrowing costs, particularly on regularly funded large-ticket items such as houses and capital equipment. Rising interest rates also have a negative impact on asset prices including cryptocurrencies, offsetting the wealth effect and making banks more cautious in lending decisions.Finally, higher interest rates indicate that the central bank will continue to tighten monetary policy, dampening inflation expectations even further.<img src="https://cdn.builder.news/news/11ed07e2416b02c4a8e6023f659fee92.jpg" alt="how does the fed reserve work and who owns it" title="how fed reacts" width="600" height="397">Source: the balanceNow back to the point, inflation in the USA has reached very high peaks this year. The Fed seems to be determined in raising interest rates even more.The Federal Reserve last raised interest rates by 0.75% in June, its most aggressive move yet to try to control inflation while squeezing the US economy. The Fed has not implemented a raise of this magnitude since 1994, and similar substantial hikes are expected later this year in an effort to temper the surging economy by boosting the cost of lending.However, with the rise of CPI to 9.1%, they are being criticized for their initially tardy response. As a result, the Fed has swung forcefully against inflation, unsettling financial markets and increasing the possibility that its policies may tip the US economy into recession. Both Bostic and Mester argued that there should be no trade-off between inflation and employment, claiming that they must maintain price stability even if it means harming the labor market.Given the acceleration in monthly inflation, economists at Nomura Securities International now expect the Fed's benchmark rate to rise by 1% at the forthcoming policy meeting. Fed Chair Jerome Powell told reporters last month, after the Fed hiked rates by 75 basis points to a range of 1.5% to 1.75%, that a 50 or 75 basis point increase was expected in July. Since then, the bulk of his colleagues have either agreed with him or supported the larger move.<h2>The impact of US CPI on crypto market</h2>The market has been extremely scared after this news came out. The question is, how much impact will CPI have on crypto market? Here are the events in chronological order.<ul><li>The Fed's negative influence on Bitcoin and crypto dates back much further: on January 5, the FOMC released its December 14-15 minutes, in which it signaled that interest rates were expected to rise in 2022. Following this publication, BTC fell from $46,500 to $43,200 in a matter of hours, then falling to $41,500 a few days later, marking a 10% drop.</li><li>When the Federal Reserve convened on January 26, BTC declined from around $38,000 to $35,600. This was a 6-percentage-point drop in less than 24 hours.</li><li>After the interest rate raise in April, the largest cryptocurrency fell as much as 3.2 % to $38,236, the lowest since March 15, and down more than 20% from its high last month. Ether, the second-largest coin, fell as much as 4.8 percent to $2,799, a low not seen since March 18.</li><li>Recently, after a three-day drop, Bitcoin managed to recover ahead of the release of the US CPI report on Wednesday. However, with prices falling back below the critical $20,000 handle this week, risk appetite staying sluggish throughout financial markets, and the US currency strengthening, the outlook for BTC/USD remains bearish. Bitcoin fell in value on Wednesday morning following reports that US inflation touched 9.1 percent in June, the highest rate in 41 years. On the day of the release of the higher-than-expected consumer price index (CPI) report, Bitcoin fell to a 24-hour low of $19,078. The largest cryptocurrency by market capitalization is down 72% from its all-time high in November. Ether, the second-largest cryptocurrency, fell as well, reaching $1,022. The largest cryptocurrency by market capitalization is down 72% from its all-time high in November.</li></ul>The reason for this is borrowing at exceptionally low interest rates incentivizes borrowers. Low interest rates benefit risky assets such as stocks and cryptocurrency, making them appear to be a more appealing investment when compared to yields on bonds and fixed income instruments such as certificates of deposit (CDs).A rise in interest rates, on the other hand, makes borrowing more difficult and expensive for both consumers and businesses. This could lead to a drop in activity in hazardous assets like cryptocurrency.<img src="https://cdn.builder.news/news/11ed07e2416b0818a8e6023f659fee92.jpg" alt="US CPI and Cryptocurrency" title="US CPI and Cryptocurrency" width="600" height="401">Pessimistically, more rate hikes may drag down bitcoin and crypto in general, assuring that 2022 becomes a year of another cryptocurrency bear market. Nobody knows how much prices will fall, but with the crypto market plunging by as much as 89 percent between December 2017 and December 2018, the worst-case scenario might be really severe.Optimistically, even though interest rates are higher than before, there is a very real probability that crypto prices may rise again. This is because the first shock element of greater inflation will gradually diminish. In volatile markets like cryptocurrency, even a minor statement can drive investors into a frenzy.This is why so many investors sold all of their cryptocurrency investments in a few days. However, as the market adjusts to these interest rates, crypto prices will settle and begin to grow. But how much will they increase? Nobody truly knows. It is unlikely that cryptocurrencies will reach fresh highs anytime soon.<h2>Writer’s opinion</h2>The crypto market is always changing. We've come a long way since Bitcoin was first introduced in 2009. There are now other additional cryptocurrencies, each with its own set of features and guidelines.But, at the end of the day, do higher CPI figures have an impact on cryptocurrency values right now? Absolutely. The evidence is practically all over the place right now. However, when it comes to crypto prices, interest rates may no longer be the most significant thing in the world. To do so, cryptocurrency will need to be increasingly isolated from the global economy. That is the purpose of decentralizing cryptocurrencies, so it will be interesting to see what occurs next.Written by Blue Pine<div class="pr-block-special">Disclaimer: This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.</div>

US Consumer Price Index (CPI) hit an all-time high in 41 years.  So what is CPI, how does FED react to it, and what does it have to do with crypto market?

How US CPI affects crypto market?