Thu Jan 25 17:30:00 CST 2018

Consensus Actual Previous
Ex Food-Y/Y 0.9% 0.9% 0.9%
CPI-M/M 0.2% 0.7%
CPI-Y/Y 1.0% 0.6%
Ex Food-M/M 0.0% 0.2%
Ex Food & Energy-M/M 0.0% 0.1%
Ex Food & Energy-Y/Y 0.3% 0.3%

Japan's consumer price index increased by 1.0 percent on the year in December, up from an increase of 0.6 percent in November and closer to the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI rose 0.2 percent on the month in November after an increase of 0.7 percent in November.

An increase in food prices was the main factor pushing up headline inflation in December, with price changes again relatively steady in other major categories of spending. After falling 0.1 percent on the year in November, food prices increased by 1.8 percent on the year in December. Housing costs fell 0.1 percent on they ear in December, unchanged from November, while the year-on-year increase in utilities charges slowed from 5.9 percent to 5.2 percent.

Core CPI, which excludes fresh food prices, advanced 0.9 percent on the year in December, unchanged from November and in line with the consensus forecast. This measure of inflation trended higher in 2017 after year-on-year declines for almost all of 2016. The index was flat on the month in seasonally adjusted terms in December after an increase of 0.2 percent in November.

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 December, also unchanged from November. This index was also flat on the month on a seasonally adjusted basis after an increase of 0.1 percent previously.

Although underlying measures of inflation were steady in December, the trend remains positive, broadly in line with the BoJ's forecasts. At their policy meeting held earlier in the week officials retained their assessment that inflation would increase gradually towards their 2.0 percent target. Officials retain their forecast for the year-on-year change in the consumer price index (excluding fresh food) to be 0.8 percent in the current fiscal year and 1.4 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.

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.