Thu Jun 21 18:30:00 CDT 2018

Consensus Actual Previous
Ex Food-Y/Y 0.7% 0.7% 0.7%
CPI-Y/Y 0.7% 0.6%
CPI-M/M 0.1% -0.4%
Ex Food-M/M 0.0% -0.1%
Ex Food & Energy-M/M 0.0% -0.1%
Ex Food & Energy-Y/Y 0.3% 0.4%

Inflation data released today show consumer price pressures remain subdued in Japan in May, with both headline and underlying measures of inflation little changed from April and still at low levels. The headline consumer price index increased by 0.7 percent on the year in May, up slightly from an increase of 0.6 percent in April, but still well below the Bank of Japan's 2.0 percent inflation target. Seasonally adjusted headline CPI advanced 0.1 percent on the month after falling 0.4 percent in April.

Price increases were relatively steady for most categories of consumer spending in May. Utilities charges, representing around 7 percent on the index, saw the biggest change, increasing 3.1 percent on the year in May after increasing 3.6 percent in April, while food prices, which account for just over a quarter of the total index, rose 0.7 percent on the year, down slightly from 0.8 percent previously. Housing costs, just over fifth of the index, fell 0.1 percent on the year after dropping 0.2 percent previously, while the year-on-year increase in transport and communication costs, representing around 15 percent of the index, picked up from 1.1 percent to 1.3 percent.

Core CPI, which excludes fresh food prices, also rose 0.7 percent on the year in May, unchanged from April and matching the consensus forecast. This measure of inflation had trended higher since early 2017 and into the new year but has stalled over the last three months. The index was flat on the month in May after falling 0.1 percent in April.

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 May, also down from 0.4 percent in April. This index was also flat on the month in May after falling 0.1 percent in April.

Recent weakness in inflation was noted by BoJ officials at their policy meeting held last week, with Governor Haruhiko Kuroda attributing this in part to the strength of the domestic currency and productivity gains in the services sector. Nevertheless, he expressed confidence that momentum towards reaching the 2.0 percent inflation target remains intact, reflecting his assessment that the output gap will improve and inflation expectations strengthen.

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.