Consumer inflation in Japan was steady to slower just above 3 percent in two key measures in March after slowing significantly the previous month from four-decade highs of over 4 percent in January as expanded subsidies to electricity and natural gas suppliers continued to cap energy costs, data from the Ministry of Internal Affairs and Communication released Friday showed.

But the annual rate of the core-core index (excluding fresh food and energy) accelerated toward 4 percent, reflecting a widespread move among processed food suppliers to pass last year's spike in producer and import costs onto customers.

The Bank of Japan's policy board under the new governor, Kazuo Ueda, is expected to maintain its monetary easing stance at its meeting on April 27-28, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to guide inflation toward the stable 2 percent target with sustained wage growth.

The Econoday Consensus Divergence Index stands at plus 24, above zero, which indicates the Japanese economy is performing better than expected. Excluding the impact of inflation, the index is at plus 30.

The national average core consumer price index (excluding fresh food) rose 3.1 percent from a year earlier in March in line with the median economist forecast for a 3.1 percent rise. It is the 19th straight year-over-year increase after rising 3.1 percent in February (the first deceleration in 13 months), 4.2 percent in January and 4.0 percent in December.

The 4.2 percent rise in January is a 41-year high, the largest increase since the 4.2 percent gain in September 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.

Service prices in Japan are subdued due to slow wage hikes but they have moved up in recent months as more companies are providing special allowances to tide over high costs for daily necessities and some firms are raising salaries to secure qualified workers. Service prices excluding owners' equivalent rent rose 2.2 percent in March, up from 1.9 percent in February, 1.7 percent in January and 1.1 percent in December. Goods prices, which include fresh food, posted a slower gain of 4.8 percent in March after rising 5.0 percent in February.

In fiscal 2022 that ended last month, the core CPI rose 3.0 percent after rising 0.1 percent in the previous fiscal year, falling 0.4 percent in fiscal 2020 and rising 0.6 percent in fiscal 2019. It compared with 3.0 percent, the median forecast by the Bank of Japan's nine-member board provided in the bank's quarterly Outlook Report released in January.

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, noting the impact of government subsidies to cap retail gasoline and utility prices will wane. The latest projections including the first estimate for fiscal 2025 will be released on April 28.

The underlying inflation rate -- measured by the core-core CPI (excluding fresh food and energy) -- jumped 3.8 percent on year in March, recording a fresh 41-year high, after rising 3.5 percent in February and marking the 12th straight increase. It was above the median economist forecast for a 3.7 percent rise. The 3.8 percent rise is the largest since the 3.9 percent increase December 1981. This narrow measure is without the effects of energy cost fluctuations. It has been pushed up by markups in various items including processed food.

In fiscal 2022, the core-core CPI gained 2.2 percent after falling 0.8 percent in fiscal 2021 and coming in just above the BoJ board projection of a 2.1 percent rise. The board forecast the narrow measure will slow to 1.8 percent in fiscal 2023 and 1.6 percent in fiscal 2024.

The total CPI rose 3.2 percent on year in March, marking the 19th consecutive year-over-year increase after rising 3.3 percent in February and 4.3 percent in January. It was in line with the median forecast of 3.2 percent. Fresh food prices, a volatile factor, rose 5.4 percent on year and pushed up the overall index by 0.22 percentage point after rising 5.8 percent (up 0.24 point) the previous month. The 4.3 percent increase January's total CPI is a 41-year high, the largest since the 4.3 percent rise in December 1981.

Among key components of the CPI basket of goods and services, energy prices slumped 3.8 percent on year in March, pushing down the CPI by 0.32 percentage point, after falling 0.7 percent with a negative 0.06-point contribution in February (the first drop since March 2021) and rising 14.6 percent in January with a positive 1.17-point contribution, which was already much slower than the recent peak of a 20.8 percent rise (plus 1.46 points) in March 2022. The government has been trying to cap retail gasoline price markups by providing subsidies to refineries. The utilities subsidies that took place in January and were reflected in February bills will continue through September.

Japan's consumer inflation is seen stable at just above 3 percent in the total index, up 3.2 percent on year in March versus 3.3 percent in February, and the core (excluding fresh food) measure, up 3.1 percent versus 3.1 percent. But the increase in the narrow core-core index, which excludes both fresh food and energy, is set to accelerate further to 3.7 percent from 3.5 percent as food suppliers are still trying to reflect last year's spike in import and producer costs. The upward pressure from processed food and durable goods is more than offsetting the dampening impact of the government's expanded energy subsidies that took effect in January.

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.