Mon Dec 25 17:30:00 CST 2017

Consensus Actual Previous
Ex Food-Y/Y 0.8% 0.9% 0.8%
CPI-M/M 0.7% 0.0%
CPI-Y/Y 0.6% 0.2%
Ex Food-M/M 0.2% 0.2%
Ex Food & Energy-M/M 0.1% 0.1%
Ex Food & Energy-Y/Y 0.3% 0.2%

Japan's consumer price index increased by 0.6 percent on the year in November, up from an increase of 0.2 percent in October but still well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI rose 0.7 percent on the month in November after no change in October.

A smaller year-on-year fall in food prices was the main factor pushing up headline inflation in November. These fell just 0.1 percent on the year after falling by 1.3 percent in October. Price changes were relatively steady in other major categories of spending. Fuel, light and water charges advanced 5.9 percent on the year in November, down from 6.2 percent in October, while transport and communications prices rose 0.8 percent on the year after an increase of 0.6 percent in October. Housing costs fell 0.1 percent on the year in November, unchanged from October's decline.

Core CPI, which excludes fresh food prices, advanced 0.9 percent on the year in November, up from 0.8 percent in October and above the consensus forecast of 0.8 percent. 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 rose 0.2 percent on the month in November in seasonally adjusted terms, matching the increase recorded in October.

The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, advanced 0.3 percent on the year in November, up from 0.2 percent in October. This index rose 0.1 percent on the month on a seasonally adjusted basis, matching the increase recorded in in October.

Today's data show core inflation is continuing to trend higher, broadly in line with officials' forecasts. At their last policy meeting held earlier in the month officials retained their assessment that inflation would increase gradually towards their target of 2.0 percent.

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.