Thu Sep 24 18:30:00 CDT 2015

Consensus Actual Previous
Ex Food-Y/Y -0.1% -0.1% 0.0%
CPI-M/M 0.2% -0.1%
CPI-Y/Y 0.2% 0.2%
Ex Food-M/M 0.0% 0.0%
Ex Food & Energy-M/M 0.3% 0.1%
Ex Food & Energy-Y/Y 0.8% 0.6%

Inflation continues to defy the Bank of Japan. As expected the consumer price index excluding fresh food slipped 0.1 percent on the year and was unchanged on the month. The CPI excluding both fresh food and energy was up 0.3 percent and 0.8 percent on the year. Energy prices continue to weigh on the index, declining 10.5 percent on the year. However, food excluding perishables was up 1.8 percent from a year ago while electronics goods and TV were up 5.4 percent and 8.7 percent respectively.

Only last week, Bank of Japan governor Haruhiko Kuroda reiterated that the country remains on track to reach its 2 percent inflation target around the first half of 2016 (it had originally been by April 2015) as the effects of low oil prices fade and the economy continues its moderate recovery. But that target still looks way off, given the most recent data show prices going backward at the core level.

Economists expect the BoJ will have to expand it quantitative and qualitative easing programme, probably at its October meeting, from its current level of growing the asset base at an annual pace of Y80 trillion.

The consumer price index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

The CPI has been in the spotlight as Japan struggled to make its way out of deflation. The report tracks changes in the price of a basket of goods and services that a typical Japanese household might purchase. The preferred measure is the year over year percent change. Markets will typically pay more attention to the core measure that excludes only fresh food because volatile food prices can distort overall CPI. A second core measure that excludes energy as well is also available. As the most important inflation indicator, the CPI data are closely monitored by the Bank of Japan. Rising consumer prices may prompt the BoJ to raise interest rates in order to manage inflation and slow economic growth. Higher interest rates make holding the yen more attractive to foreign investors, and this higher level of demand will place upward pressure on the value of the yen.

An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to government securities. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.