Thu Nov 30 17:30:00 CST 2017

Consensus Actual Previous
Ex Food-Y/Y 0.8% 0.8% 0.7%
CPI-M/M 0.0% 0.0%
CPI-Y/Y 0.2% 0.7%
Ex Food-M/M 0.2% 0.0%
Ex Food & Energy-M/M 0.1% 0.0%
Ex Food & Energy-Y/Y 0.2% 0.2%

Japan's consumer price index increased by 0.2 percent on the year in October, well down from an increase of 0.7 percent in September and further below the Bank of Japan's 2.0 percent inflation target. This is the weakest year-on-year increase in headline CPI since March. Seasonally adjusted headline CPI was flat on the month in October for a second consecutive month.

Weaker food prices were the main factor dragging down headline inflation in October. These fell 1.3 percent on the year after increasing by 1.0 percent in September. Price gains were relatively steady in other major categories of spending. Fuel, light and water charges advanced 6.2 percent on the year in October, up slightly from 6.0 percent in September, while housing costs fell by 0.1 percent on the year after a 0.2 percent decline previously. Offsetting the weakness in food prices, transport and communications prices rose 0.6 percent on the year after no change in September.

Highlighting the impact of food prices on headline inflation, core CPI, which excludes fresh food prices, advanced 0.8 percent on the year in October, up from 0.7 percent in September and matching the consensus forecast. This measure of inflation has been trending higher gradually over the last twelve months and has been in positive territory since the start of the year after year-on-year declines over almost all of 2016. This index advanced 0.2 on the month in October in seasonally adjusted terms after no change in September.

The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, rose 0.2 on the year in October, unchanged from the pace set in both September and August. This index rose 0.1 percent on the month on a seasonally adjusted basis after increasing by 0.2 percent in September.

Today's data show little change in underlying price pressures in October, with weaker food prices the main factor driving the dip in headline inflation. The upward trend in core inflation remains intact, though the BoJ's inflation target remains unlikely too meet for a considerable period. At their last policy meeting in late October, officials revised down their near-term forecast for inflation, mainly reflecting the impact of lower mobile phone charges.

The year-on-year change in the consumer price index (excluding fresh food) is now forecast by the BoJ to be 0.8 percent in the current fiscal year (down from the previous forecast of 1.1 percent) and to be 1.4 percent next fiscal year (down from the previous forecast of 1.5 percent). 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 (unchanged from the previous estimate). Based on these revised inflation forecasts, the BoJ still expects to meet its inflation target sometime "around" the fiscal year starting April 2019.

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.