Thu Aug 24 18:30:00 CDT 2017

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

Japan's consumer price index increased by 0.4 percent on the year in July, unchanged from the increase recorded in both May and June and in line with the consensus forecast. Year-on-year increases in headline CPI have now been in positive territory for ten consecutive months but remain well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI was flat on the month in July, also matching the May and June result.

Ongoing stability in the year-on-year change in the headline index reflects offsetting moves in prices for some of the major categories of consumer spending. The year-on-year change in food prices eased from 0.8 percent in June to 0.6 percent in July, while prices for clothes and footwear were flat on the year after increasing by 0.2 percent in June. These declines were partly offset by a stronger increase in fuel, light and water charges, up from 3.5 percent to 4.3 percent. while transportation and communication costs also picked up by 0.1 percent on the year in July after a 0.1 percent decline in June. Housing costs fell 0.2 percent on the year in July, as they did in June.

Core CPI, which excludes fresh food prices, advanced 0.5 percent in July, up slightly from 0.4 percent in June and above the consensus forecast of 0.4 percent. This measure of inflation has been trending higher gradually over the last twelve months and has now been in positive territory for six consecutive months after year-on-year declines over almost all of 2016. This index was also flat on the month in July in seasonally adjusted terms, as in June.

The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, rose 0.1 on the year in July after recording no change on the year in the previous three months. This index was unchanged on the month on a seasonally adjusted basis, as in June.

Today's data show slight increases in underlying measures of inflation but also provides further confirmation that price pressures remain very weak in Japan, highlighting the challenges officials continue to face in meeting their inflation target. The BoJ forecasts the year-on-year change in the consumer price index (excluding fresh food) to be 1.1 percent in the current fiscal year and 1.5 percent next fiscal year. Excluding the impact of a planned sales tax increase, this measure of inflation is forecast to be 1.8 percent in the fiscal year starting April 2019. Based on these revised inflation forecasts, the BoJ currently expects to meet its inflation target sometime "around" the fiscal year starting April 2019, after previously estimating that this target would be reached sometime "around" the fiscal year starting in April 2018.

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.