Consumer inflation in Tokyo, the leading indicator of the national average, accelerated at a slightly faster pace than expected in February after easing sharply in January as the base effect of utility subsidies has waned and an influx of Asian visitors during their lunar new year holidays boosted hotel fees, offsetting the impact of a slower gain in processed food prices.

The core CPI (excluding fresh food), the key measure for the Bank of Japan's policy decision, posted a 2.5 percent gain on year after marking a 22-month low of a 1.8 percent rise in January (revised up from 1.6 percent increase), coming in just above the consensus call of a 2.4 percent rise. The BoJ's target is 2.0 percent.

The year-over-year rise in the total CPI picked up to 2.6 percent from a 22-month low of 1.6 percent in January, higher than the median forecast of a 2.4 percent rise. The core-core CPI (excluding fresh food and energy) moderated slightly to a 12-month low of 3.1 percent (consensus was 3.0 percent) after easing to 3.3 percent (revised up from 3.1 percent) from December's 3.5 percent and a 41-year high of 4.0 percent hit in July 2023.

January figures were revised up after the ministry applied a change in its data collection method for overseas package tours, which was first reflected in the national CPI data for January released last month.

As consumer inflation has stabilized after an earlier spike caused by heightened geopolitical risks and global supply chain disruptions, BoJ policymakers are seeking to begin unwinding large-scale monetary stimulus after confirming clearer signs of sustained wage hikes in fiscal 2024 starting in April. Both Governor Kazuo Ueda and Deputy Governor Shinichi Uchida have said financial conditions will remain accommodative even after the bank decides to lift the negative short-term interest rate, an action expected in March or April at the earliest.

Prices of services excluding owners' equivalent rent gained 3.1 percent on the year in February, adding 1.08 point to the Tokyo CPI, following an upwardly revised 3.1 percent rise (plus 1.09 points) in January. The recent uptrend in services costs reflects moves among many firms to raise wages to secure workers. After a recent slowdown, the annual rate of goods prices excluding fresh food also rose 3.1 percent (plus 1.28 point), accelerating from a 1.3 percent rise (plus 0.53 point) the previous month.

The acceleration in the February Tokyo CPI annual rate from January stems from a 0.82-point upward drift in overall energy costs, which more than offset a 0.14-point negative gap in processed food prices between the latest and previous months (figures are rounded).

Energy prices fell 7.9 percent on year in February, pushing down the total index by 0.43 percentage point, after slumping at a much faster pace of 20.1 percent (minus 1.26 points) in January. Food excluding perishables rose 5.0 percent on year (a 1.13-point contribution to the total CPI), easing further from a 5.7 percent rise in January with a 1.27-point contribution. This category replaced energy as the largest positive contributor to the CPI increase in October 2022 (1.27 points vs. 1.20 points).

Following today's update, Econoday's Relative Performance Index stands at plus 24, above zero to indicate the Japanese economy is performing better than expected. But when excluding the impact of inflation which has exceeded expectations, the RPI is close to zero at only plus 4 to indicate as-expected results for the real economy.

Consumer inflation in Tokyo, the leading indicator of the national average, is forecast to accelerate in February after easing sharply in January as the base-year effect of utility subsidies has waned and electricity and natural gas suppliers raised retail prices, offsetting the impact of a slower gain in processed food prices. Services costs are also expected to lift overall prices amid widespread labor shortages.

The core CPI (excluding fresh food), the key measure for the Bank of Japan's policy decision, is expected to post a 2.4 percent gain on year after marking a 22-month low of a 1.6 percent rise in January. The year-over-year increase in the total CPI is also seen picking up to 2.4 percent after easing to 1.6 percent, a 22-month low. The core-core CPI (excluding fresh food and energy) annual rate is expected to ease slightly to 3.0 percent from 3.1 percent.

As seen in January national CPI data, overseas package tours are expected to surge due to a statistical distortion. The ministry has resumed reflecting pricing data collected through its web scraping method for this category, which had been suspected since January 2021. This means the February Tokyo data will reflect three years of price changes.

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.