Thu Mar 22 18:30:00 CDT 2018

Consensus Actual Previous
Ex Food-Y/Y 1.0% 1.0% 0.9%
CPI-M/M 0.1% 0.4%
CPI-Y/Y 1.5% 1.4%
Ex Food-M/M 0.1% 0.2%
Ex Food & Energy-M/M 0.1% 0.1%
Ex Food & Energy-Y/Y 0.5% 0.4%

Japan's consumer price index increased by 1.5 percent on the year in February, up from an increase of 1.4 percent in January. This takes headline consumer inflation to its highest level since March 2015 and closer to the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI rose 0.1 percent on the month in February after an increase of 0.4 percent in January.

Transport and communication prices were the main factor pushing up headline inflation in February, up 1.5 percent on the year after an increase of 0.7 percent in January. Other major categories of spending saw slightly weaker price rises, with the year-on-year increase falling from 3.2 percent to 3.0 percent for food prices and from 4.6 percent to 4.3 percent for utilities charges. Housing costs fell 0.1 percent on the year in February as they did in January.

Core CPI, which excludes fresh food prices, advanced 1.0 percent on the year in February, up from 0.9 percent in January and matching the consensus forecast. This measure of inflation has trended higher since early 2017 after year-on-year declines for almost all of 2016. The index rose 0.1 percent on the month in February after an increase of 0.2 percent in January.

The Bank of Japan's preferred measure of underlying inflation, CPI excluding fresh food and energy prices, advanced 0.5 percent on the year in February, up from 0.4 percent in December. This index rose 0.1 percent on the month after increasing the same amount previously.

The increase in both headline and underlying inflation reported today is broadly in line with the BoJ's assessment that inflation will increase gradually towards its 2.0 percent target. At their last policy meeting, held earlier in the month, officials retained 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.