Consumer inflation in Japan accelerated in two key measures in February as the base-year effect of utility subsidies had run its course and after an influx of Asian visitors during their lunar new year holidays had pushed up hotel fees, offsetting the impact of a continued slowdown in processed food price hikes.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan for its policy stance, rose 2.8 percent on year, touching a four-month high and coming in as expected, after easing to a 22-month low of 2.0 percent in January. The year-over-year increase in the total CPI climbed to a three-month high of 2.8 percent after moderating to a 22-month low of 2.2 percent. It was just below the median forecast of a 2.9 percent gain. By contrast, underlying inflation measured by the core-core CPI (excluding fresh food and energy) decelerated to a 13-month low of 3.2 percent from 3.5 percent, slightly below the median forecast of a 3.3 percent rise. The annual rate for this narrow indicator has been at or above 3.0 percent since December 2022.

Service costs have played catch-up in recent months as firms have been raising wages to secure workers amid widespread labor shortages. Service prices excluding owners' equivalent rent rose 3.1 percent on the year in February, pushing up the total CPI by 0.99 percentage point, following a 3.2 percent rise (plus 1.00 point) in January.

In contrast to services, goods prices jumped last month due to a much smaller drop in utility charges. Goods prices excluding fresh food gained 3.4 percent (plus 1.66 points), after a 1.9 percent increase (plus 0.93 point).

Weak consumer spending amid elevated living costs is reflected in Econoday's Relative Performance Index. It stands at minus 9, below zero, which indicates the Japanese economy is performing slightly worse than expected. Excluding the impact of inflation, the RPI is at minus 29.

At its March 18-19 meeting, the Bank of Japan's nine-member board decided in a majority vote to end its seven-year-old yield curve control framework and lift the minus 0.1 percent overnight interest rate target to a range of zero to 0.1 percent from minus 0.1 percent, its first rate hike in 17 years. Many board members believe that the risk of Japan's economy slipping back into deflation has been reduced and inflation is likely to be led by sustained wage hikes, instead of a spike in import costs, following news last week that wage hikes for fiscal 2024 that begins next month are set to well surpass the pace of increase seen in the previous year.

Consumer inflation in Japan is expected to accelerate in two key measures in February as the base-year effect of utility subsidies has run its course and after an influx of Asian visitors during their lunar new year holidays boosted hotel fees, offsetting a continued slowdown in price hikes for processed foods.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan for its policy stance, is forecast to rise 2.8 percent on year, a four-month high, after easing to a 22-month low of 2.0 percent in January. The year-over-year increase in the total CPI is also seen climbing to a four-month high of 2.9 percent after moderating to a 22-month low of 2.2 percent. By contrast, underlying inflation measured by the core-core CPI (excluding fresh food and energy) is expected to decelerate to a 13-month low of 3.3 percent from 3.5 percent. The annual rate for this narrow indicator has been at or above 3.0 percent since December 2022.

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.