Consumer inflation in Japan continued easing in December in line with consensus forecasts for all three key measures as food and beverage markups had already peaked, energy prices remain on a downtrend amid slower global demand and utility subsidies, and the recent surge in hotel fees on base-year effects slowed slightly.

The core CPI (excluding fresh food prices), the key measure for the Bank of Japan to assess whether inflation is anchored around its 2 percent target, rose 2.3 percent on the year, led by easing but still high processed food prices and rising service costs amid widespread labor shortages, after a 2.5 percent rise in November. The pace of increase is the slowest in 18 months. The year-over-year increase in the total CPI also slowed to a 17-month low of 2.6 percent after easing to 2.8 percent in November from a temporary uptick to 3.3 percent in October.

Underlying inflation measured by the core-core CPI (excluding fresh food and energy) decelerated to a 10-month low of 3.7 percent from 3.8 percent in November and from a 42-year high of 4.3 percent seen last summer.

Econoday's Relative Performance Index (RPI) stood at plus 4, just above zero, which indicates the Japanese economy is performing largely as expected. Excluding the impact of inflation, the RPI was at minus 6.

In its quarterly Outlook Report due next week, the BoJ board is likely to slightly revise down its inflation forecast for fiscal 2024 from October's 2.8 percent and leave its projection for the current fiscal year little changed at 2.8 percent and that for fiscal 2025 at 1.7 percent, below the bank's 2 percent target.

At its Jan. 22-23 meeting, the BoJ is widely expected to retain its guidance that it will"patiently continue with monetary easing" in order to"achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases." To this effect, it is likely to keep the targets of minus 0.1 percent for the short-term policy rate and"around zero percent" for the 10-year bond yield for now. Bank officials have said they want to confirm continued wage hikes in fiscal 2024 starting in April and higher services costs that reflect better earnings among smaller firms.

Service prices rose at a faster pace than goods prices for the second month in a row as firms are raising wages to secure workers amid widespread labor shortages but real wages remain below year-earlier levels. Service prices excluding owners' equivalent rent rose 3.3 percent on the year in December, pushing up the total CPI by 1.04 percentage points, after rising 3.4 percent (plus 1.06 points) in November. Goods prices excluding fresh food gained 2.3 percent (plus 1.12 points), slowing further from a 2.7 percent increase (plus 1.33 points).

Consumer inflation in Japan is expected to continue easing in December as food and beverage markups have already peaked, energy prices remain on a downtrend amid slower global demand and utility subsidies, and the recent surge in hotel fees on base-year effects slowed slightly.

The core CPI (excluding fresh food prices), the key measure for the Bank of Japan to assess whether inflation is anchored around its 2 percent target, is forecast to have risen 2.3 percent on the year, led by easing but still high processed food prices and rising service costs amid widespread labor shortages, following a 2.5 percent rise in November. The pace of increase would be the slowest in 18 months. The year-over-year increase in the total CPI is also seen slowing to 2.6 percent from 2.8 percent in November.

Underlying inflation measured by the core-core CPI (excluding fresh food and energy) is expected to have decelerated to a 10-month low of 3.7 percent from 3.8 percent in November and from a 42-year high of 4.3 percent recorded in the summer.

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.