The US Consumer Price Index (CPI) hit yet another high of 8.54% Tuesday – rates not seen since 1981.
The CPI’s latest numbers give a moment to reflect on money alternatives, namely Bitcoin. While CPI hit a 40 year high, Bitcoin’s inflation continues in a downtrend over its entire life cycle.
Bitcoin’s inflation rate
Bitcoin’s current inflation rate is 1.8%. That inflation rate sits below the US’ typical CPI numbers of 2-3%, below the current CPI and well below the rise in the value of the M2 money supply at between 11-27%.
For reference, the Bureau of Labor Statistics (BLS) defines CPI as the “changes in prices of all goods and services purchased for consumption by urban households.” CPI goods are continuously changing under the rationale that if the price of a certain good continues to go up, it's too expensive to be bought by the average household.
Take it from Microstrategy CEO Michael Saylor, who laid out the CPI methodology in a prescient tweet from April 2021: “Inflation is a vector. Prices adjust each period, in each location, for each product, service, & asset, segmented by quality & packaging. Scarce, desirable, difficult to manufacture items appreciate the most over time. CPI is a weighted index of items unlikely to inflate.”
Bitcoin's transparent and consistent monetary issuance stands in stark contrast to that of fiat money, which swings up and down unpredictably at the whim of politicians. As we will see below, Bitcoin's issuance schedule strays downward, as guided by halvenings.
Inflation in M2 terms
How is inflation measured at a fundamental or first principles level?
As Investopedia puts it, "M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy."
Most Bitcoiners further believe that the expansion of the money supply is the root cause of inflation. By measuring year-over-year (YoY) growth in M2 against CPI values, solid collaboration for the theory is found.monetary expansion is revealed.
Bitcoin inflation, M2 and CPI
Bitcoin’s issuance is cut in half every four years creating an exponential decay in inflation, as noted in a December issue of Mining Memo. Currently, Bitcoin’s total supply issued stands at 90%. Furthermore, it’s becoming increasingly difficult to mine Bitcoin. For example, it will take 30+ years to mine the final Bitcoin. With CPI and M2 increasing parabolically, Bitcoin becomes an attractive alternative.
The USD’s inflationary bias compared to Bitcoin’s set issuance schedule acts as a real world example of two economic systems: fiat money and sound money.
Today, the consequences of the dollar’s inflationary upswing are visible everywhere. Just check the gas pump. And while Bitcoin may not be ready for prime time action yet, it's increasingly clear that a Bitcoin denominated world would have significantly different monetary episodes.