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The Potential Impact of Increased Chinese CPI on Cryptocurrency

The Chinese government has released its latest inflation data, revealing the Consumer Price Index (CPI) statistics for May 2022. The CPI which is measured in relative terms reveals a year-on-year increase of 2.1 percent. This shows that compared to the past year, the relative prices paid by citizens of China over consumer goods have risen by 2.1 percent. However, on the same relative backdrop, a comparison with the previous month shows a drop in inflation, with the month-on-month CPI dropping by 0.2 percent.

According to Dong Lijuan, a senior statistician with China’s National Bureau of Statistics (NBS), the 0.2 percent month-on-month drop in inflation is linked to the effective Covid-19 control measures implemented by the country. He also added that the sufficient supply of consumer goods in recent times also contributed to this reduction in inflation.

In more detail, food prices that climbed by 0.9 percent in April 2022 have reversed the trend, falling by 1.3 percent month-on-month in the latest report. This price drop has lowered the monthly consumer inflation by about 0.24 percentage points. Another economic index that was released by the Chinese government is the producer price index, which measures the price of goods at the factory gate. The producer price index rose by 6.4 percent year-on-year in May.

Economic data such as the ones mentioned above always have an impact on investor sentiment and other areas of the economic circle. It is also interesting to note that how these indices affect the mood of the market has varied over time. The dynamism of market relationship with fundamental economic data has been an element of evolution. Hence, what was obtainable a few years ago in terms of market response to economic data may not be applicable today.

The cryptocurrency market is not exempted from the impact of national and global economic indices. Unlike the early days of cryptocurrency development when the crypto market operated like an exclusive environment that did not overlap with traditional markets, a lot has changed. The influx of institutional investors, plus the growing national interests in the cryptocurrency markets are influencing market sentiments. They have also shaped how the cryptocurrency market responds to economic data like the just-released CPI.

Despite being banned in China, cryptocurrency prices cannot be exonerated from the impact of economic data coming out of the country. China remains one of the largest economies in the world. Hence the overall condition of its economy reflects on both the mainstream and independent markets across the globe. This is similar to the impact of the United States economy on the global market.

In April, there was a significant plunge in the price of cryptocurrencies which coincided with a decline in the US stock market futures. Both declines were largely attributed to the 8.5 percent year-on-year increase in the March CPI. This sparked inflation fears and the possibility of a recession in the near to medium term.

In the past, such fears in the mainstream economy would have engineered a boost in the cryptocurrency markets. Then, most crypto users saw it as a hedge against inflation and an alternative to the traditional markets. However, as mentioned above, the dynamics have changed significantly. With the several ETFs that have been launched and the influx of institutional investors, there is a level of synchronization across both markets.

The cryptocurrency market has been in a bearish trend for most of 2022. Many analysts expect the sell-off to be running out of steam, with a reversal expected soon. China’s recently released CPI data may suggest an improving market, but not to the extent of causing a drastic change in trend, especially in the near term. With the US yet to release its figures, and that of other major economies expected, crypto investors will be observing closely. Perhaps, investors may need to hang on a little longer for the anticipated reversal to happen.


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