Consumer inflation in Japan accelerated in December, with the core measure setting a 41-year high of 4.0 percent, as more firms raised prices for a wide range of food and beverages and city gas providers continued passing high energy and import costs on to users, data from the Ministry of Internal Affairs and Communication released Friday showed.

The yen has rebounded slightly but remains relatively weak compared to its year-earlier levels, eroding Japan's purchasing power and keeping the costs for importing materials and products high.

The current spike in consumer inflation has been caused by elevated energy and commodities costs and supply constraints. Unlike in North America, service prices in Japan are subdued, up just 0.8 percent on year in December, compared to a 7.1 percent surge in goods prices, as wage growth remains slow.

The Econoday Consensus Divergence Index stands at minus 8, below zero, which indicates the Japanese economy is performing slightly worse than expected after underperforming more sharply and outperforming earlier. Excluding the impact of inflation, the index is at minus 13.

The national average core consumer price index (excluding fresh food) soared 4.0 percent from a year earlier in December in line with the median economist forecast for a 4.0 percent rise. It is the 16th straight year-over-year increase after rising 3.7 percent in November, 3.6 percent in October and 3.0 percent in September. The 0.1 percent rise in September 2021 was the first increase in 18 months.

The 4.0 percent rise is a 41-year high, the largest increase since the 4.0 percent rise in December 1981, with or without the direct impact of the sales tax hikes in 2014 (from 5 percent to 8 percent) and in 1997 (from 3 percent to 5 percent) and the introduction of the sales tax in 1989. The tax was further raised to 10 percent in 2019 but had only a limited impact on prices.

Bank of Japan Governor Haruhiko Kuroda told reporters on Wednesday that the bank needs to maintain its accommodative monetary policy stance under the yield curve control framework until inflation reaches stable 2 percent with solid wage growth and a positive output gap.

The BoJ's quarterly Outlook Report released Wednesday showed the median forecast by the nine-member board for the core CPI annual rate was revised up to 3.0 percent for fiscal 2022 ending next March from 2.9 percent projected in October. The average of year-over-year gains in the core reading for the first nine months of fiscal 2022 is 2.9 percent, compared to a 0.1 percent rise in the full year of fiscal 2021.

The board projected that the increase in the core CPI would slow to 1.6 percent in fiscal 2023 as the base effects of the current spike in energy and commodities prices fade, unchanged from its October forecast. For fiscal 2024, the board expects the core reading to rise 1.8 percent, slightly higher than its 1.6 percent projection made three months ago, noting the impact of government subsidies to cap retail gasoline and utility prices will wane.

For the whole of calendar 2022, the core CPI jumped 2.3 percent on the year after dipping 0.2 percent in both 2021 and 2020 and following modest gains of 0.6 percent in 2019, 0.9 percent in 2018 and 0.5 percent in 2017, a 0.3 percent slip in 2016 and increases of 0.5 percent in 2015 and 2.6 percent in 2014, which was inflated by the three-percentage-point hike in the sales tax rate in April that year. Excluding the direct impact of tax changes, the 2.3 percent rise is the largest since the 2.9 percent rise in 1991.

The underlying inflation rate -- measured by the core-core CPI (excluding fresh food and energy) -- accelerated to 3.0 percent in December from 2.8 percent in November and 2.5 percent in October, marking the ninth straight increase and is now an over 31-year high. It came in just under the median economist forecast for a 3.1 percent rise. The 3.0 percent rise is the largest since the 3.0 percent increase in August 1991 in the aftermath of the Gulf War that began in August 1990 and lasted for about seven months. This narrow measure is not receiving support from elevated energy prices but has been gradually pushed up by markups in various items.

As a reference forecast, the BoJ board projected this week that the core-core CPI would rise 2.1 percent in fiscal 2022 (so far up 1.7 percent), revised up from its October forecast of 1.8 percent, and that the increase would slow to 1.8 percent (revised up from 1.6 percent) in fiscal 2023 and 1.6 percent (unrevised) in fiscal 2024.

The total CPI surged 4.0 percent on year in December, marking the 16th consecutive year-over-year increase after increases of 3.8 percent in November, 3.7 percent in October and 3.0 percent in September. It came in slightly below the consensus forecast of a 4.1 percent increase. Fresh food prices, a volatile factor, rose 4.9 percent on year and pushed up the overall index by 0.19 percentage point after rising 7.3 percent (up 0.29 point) the previous month. The 4.0 percent increase in total CPI is nearly a 32-year high, the largest since the 4.0 percent rise in January 1991 in the wake of the 1990-1991 Gulf War.

Consumer inflation in Japan is forecast to have accelerated sharply in December, with the core measure (excluding fresh food) seen setting a 41-year high of 4.0 percent versus 3.7 percent in November, as more firms raised prices for a wide range of food and beverages and city gas providers continued passing high energy and import costs on to users. The total CPI is seen up 4.1 percent, a 32-year high, after a 3.8 percent gain in November.

The underlying inflation rate -- measured by the core-core CPI (excluding fresh food and energy) – is also seen rising to 3.1 percent, an over 31-year high, from 2.8 percent in the prior month.

The yen has rebounded slightly but remains relatively weak compared to its year-earlier levels, eroding Japan's purchasing power and keeping the costs for importing materials and products high.

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.