September 29, 2016 06:30 CDT

Consensus Actual Previous
Ex Food-Y/Y -0.4% -0.5% -0.5%
CPI-M/M 0.0% -0.2%
CPI-Y/Y -0.5% -0.4%
Ex Food-M/M 0.0% -0.2%
Ex Food & Energy-M/M 0.1% -0.2%
Ex Food & Energy-Y/Y 0.2% 0.3%

August consumer price index remains mired in deflation. Both the headline and core CPIs were down 0.5 percent from the same month a year ago making no progress towards the Bank of Japan's new inflation target of over 2 percent. This makes it the equal-lowest reading for core CPI since March 2013 and the sixth straight month of deflation, equaling the previous six-month bout that ran from November 2012 to April 2013. The 'core core' CPI which excludes all food and energy was up 0.2 percent on the year. This was the lowest reading since October 2013.

Energy costs dropped 10.2 percent after sliding 11.3 percent in July. CPI TVs tumbled 15.3 percent after 11.9 percent. Electronic goods were down 2.4 percent on the year. They were unchanged in July. Food excluding perishables was up 1.1 percent after increasing 1.2 percent in July.

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.