Thu Aug 25 18:30:00 CDT 2016

Actual Previous Consensus
CPI-M/M -0.2% -0.2%
CPI-Y/Y -0.4% -0.4% -0.3%
Ex Food-M/M -0.2% -0.1%
Ex Food-Y/Y -0.5% -0.5% -0.4%
Ex Food & Energy-M/M -0.2% -0.2%
Ex Food & Energy-Y/Y 0.3% 0.4%

July consumer price index was up 0.2 percent on the month but down 0.4 percent from the same month a year ago as Japan continued to show no improvement in its fight against deflation. The preferred CPI excluding fresh food also was up 0.2 percent but dropped a greater than expected 0.5 percent from a year ago. However, when excluding energy along with food, the CPI was down 0.2 percent on the month but was up 0.3 percent from a year ago.

Energy costs dropped 11.3 percent on the year while televisions sank 11.9 percent. Electronics were flat after climbing in June. The total CPI food excluding perishables was up 1.2 percent on the year.

This report will put more pressure on the Bank of Japan to take further action at its September meeting. The BoJ disappointed markets last month with only an expansion to its ETF purchase program and a promise to review its quantitative easing program and negative interest rate policy at this upcoming meeting.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Annual 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.