Consumer prices in Tokyo, the leading indicator of the national average, accelerated at a faster pace than expected in April, rising 3.5 percent on year in two measures, as food suppliers and durable goods makers continued passing higher costs onto customers, but were down from above 4 percent in January, thanks to expanded energy subsides, data from the Ministry of Internal Affairs and Communications released Friday showed.

By contrast, the narrow CPI measure surged to 3.8 percent, a 41-year high, as it is not affected by falling energy prices.

The government scheme aimed at easing the pain of many households covers a period from January to September this year, which is reflected in utility bills issued in February onward. The yen has been stable at around Y134 to the dollar in recent trading but it is weaker than the year-ago level of Y128, keeping Japanese imports expensive.

The Bank of Japan is unlikely to make a drastic change to its yield curve control policy framework for now as stable 2 percent inflation with sustained wage growth and economic growth is unlikely to be achieved soon.

The prices of goods excluding fresh food rose 5.8 percent from a year earlier in April, pushing up the Tokyo area total CPI by 2.36 percentage points, with the pace of increase accelerating from 5.5 percent (a positive 2.24-point contribution) in March. The prices of services excluding owners' equivalent rent gained 2.6 percent on the year, adding 0.92 points to the CPI, up from 2.3 percent (plus 0.81 point) March. The uptrend reflects moves among some firms to provide one-time benefits for employees to tide over surging costs for daily necessities and to secure qualified workers.

The Econoday Consensus Divergence Index stood at minus 3, just below zero, which indicates the Japanese economy is performing slightly worse than expected. Excluding the impact of inflation, the index was at minus 9.

Consumer prices in Tokyo, the leading indicator of the national average, are expected to show steady to slightly higher year-over-year gains in two key measures in April, with the total index seen at 3.3 percent versus 3.3 percent in March and the core CPI (excluding fresh food) at 3.3 percent, up from 3.2 percent the previous month. Food suppliers are passing higher costs onto customers while expanded energy subsides continue to cap utilities and gasoline prices are falling amid softer international markets. The core-core CPI (excluding fresh food and energy) is forecast to stay on an uptrend, rising 3.5 percent in April versus 3.4 percent in March.

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 Tokyo CPI data covers consumer prices in the capital’s 23 wards located in the eastern part of the Tokyo Prefecture but excludes the 26 cities and other smaller municipalities that occupy larger areas in other parts of the province (islands in the Pacific Ocean are also excluded). It is a leading indicator of the national average CPI as it is released about a month ahead of the national data. The survey for the Tokyo CPI is conducted on one day around the 12th (Wednesday, Thursday or Friday) each month and its results are released toward the end of the same month or early in the following month.

The national CPI has a larger energy weight of 712 out of 10,000, compared to 470 in the Tokyo data, because the shares of consumption of electricity, gasoline and heating oil tend to be bigger in the rural areas. There is only a slight difference in the weighting of food excluding perishables between the national data (2,230) and the Tokyo data (2,144).

The CPI has been in the spotlight as Japan struggled to make its way out of deflation. It is now closely monitored because the recent spike in energy and commodity markets and supply chain constraints during the global pandemic boosted Japan’s inflation rate to the highest in over four decades in 2022.

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.