Inflation in the US economy is projected to reach its highest level since 2018 when numbers are reported Thursday. The Consumer Price Index (CPI), which measures the costs of goods and services, is anticipated to grow by more than 2%. Bitcoin’s total supply is also about to reduce thanks to a halving event.
Inflation is an important statistic when evaluating economic stability. As the economy grows, inflation represents a check and balance that reveals just where the money is coming from.
When economic growth appears to surge, a corresponding increase in inflation could simply mean that the funds for the growth are the result of central bank policies. As a central bank injects liquidity into the market, inflation grows even as the market sees growth as well. In other words, dollars aren’t worth quite as much as they were before. [MarketWatch]
The Federal Reserve (Fed) is responsible for regulating the amount of liquidity in the market. This is generally accomplished through a host of financial instruments including fixing interest rates, quantitative easing, and other measures.
A high inflation number would appear to indicate that the Fed has allowed too much liquidity into the market. While this may well result in an apparent economic surge (witness the current all-time highs in stocks), the actual value of the financial growth is smaller than it appears.
Conversely, Bitcoin’s supply is being reduced in the coming months. The built-in supply reduction comes in the form of ‘halving’—the reduction of miner rewards for each block generated.
By reducing the supply of Bitcoin at regular intervals, the coin has an inbuilt inflation check. Rather than increasing supply and thereby reducing value, Bitcoin’s supply automatically reduces, corresponding to a likely increase in value.
Furthermore, as buyers stock up on Bitcoin, the amount of Bitcoin that is liquid in the market is reduced as well. This results in a stronger demand curve, with reduced supply—a recipe for price increases.
