Consumer inflation in Japan picked up to around 3.5 percent in April in both the total and core indexes after being steady to slightly lower in March and slowing significantly in February, as processed food and durable goods suppliers continued raising prices to reflect elevated costs, outpacing the effects of utility subsidies, data from the Ministry of Internal Affairs and Communication released Friday showed.

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

The Bank of Japan's policy board under the new governor, Kazuo Ueda, maintained 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 23, above zero, which indicates the Japanese economy is performing better than expected. Excluding the impact of inflation, the index is at plus 33.

The national average core consumer price index (excluding fresh food) rose 3.4 percent from a year earlier in April in line with the median economist forecast for a 3.4 percent rise. It is the 20th straight year-over-year increase after rising 3.1 percent in March and 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 relatively 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 2.4 percent on the year in April, up from 2.2 percent in March. Goods prices, which include fresh food, gained 5.1 percent, up from 4.8 percent in March.

The underlying inflation rate -- measured by the core-core CPI (excluding fresh food and energy) -- surged 4.1 percent on year in April, recording a fresh 41-year high. It accelerated from 3.8 percent in March and 3.5 percent in February, marking the 13th straight increase. It was below the median economist forecast for a 4.2 percent rise. The 4.1 percent rise is the largest since the 4.2 percent increase September 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.

The total CPI rose 3.5 percent on year in April, marking the 20th consecutive year-over-year increase after rising 3.2 percent in March, 3.3 percent in February and 4.3 percent in January. It was in line with the median forecast of 3.5 percent. Fresh food prices, a volatile factor, rose 5.3 percent on year and pushed up the overall index by 0.22 percentage point after rising 5.4 percent (up 0.22 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 4.4 percent on year in April, pushing down the CPI by 0.37 percentage point, after falling 3.8 percent with a negative 0.32-point contribution in March and dipping 0.7 percent (minus 0.06-point contribution) in February, which was the first drop since March 2021. 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.

The prices for food excluding perishables, which has a large weight in the CPI basket, posted the 22nd straight year-over-year increase, up 9.0 percent (plus 2.02 points) after rising 8.2 percent (plus 1.85 points) in March. It is the largest increase in more than 46 years, since the 9.1 percent surge in May 1976. Sharp price hikes were seen among many items including prepared food (fried chicken), eating out (hamburgers), snacks and soft drinks.

Consumer inflation in Japan is picking up again in April in both the total and core indexes as processed food and durable goods suppliers continue raising prices to reflect elevated costs, outpacing the effects of utility subsidies. The year-over-year increase in the total consumer price index is forecast at 3.5 percent, up from 3.2 percent in March, while the core CPI (excluding fresh food) is seen up 3.4 percent versus 3.1 percent the previous month. The underlying inflation rate -- measured by the core-core CPI (excluding fresh food and energy) -- is expected to post an accelerated 4.2 percent versus 3.8 percent.

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.