Consumer inflation in Japan moderated in all three key measures in March in light of easing food and durable goods markups, offsetting the slight upward pressure from a slower pace of decline in energy costs after the base effect of utility subsidies had waned. Hotel fees continued to post a double-digit percentage gain on the year amid a sharp rise in the number of visitors from overseas but their pace of increase has also slowed.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan for its policy stance, rose an as-expected 2.6 percent on the year after a 2.8 percent gain in February. The increase in the total CPI unexpectedly eased to 2.7 percent from 2.8 percent despite faster fresh food price rises, coming in above the median forecast of a 2.9 percent rise.

Underlying inflation measured by the core-core CPI (excluding fresh food and energy) decelerated to a 16-month low of 2.9 percent from 3.2 percent, just below the median forecast of a 3.0 percent rise. The annual rate for this narrow indicator had been at or above 3.0 percent from December 2022 until February 2024.

Service costs have seen gradual upward pressures as many firms are offering higher wages to secure workers amid widespread labor shortages but goods prices jumped last month due to a much smaller drop in utility charges. Service prices excluding owners' equivalent rent rose 2.9 percent on the year in March, pushing up the total CPI by 0.94 percentage point, following a 3.1 percent rise (plus 0.99 point) in February; it was much higher than the 2.2 percent rise seen in March 2023. Goods prices excluding fresh food gained 3.1 percent (plus 1.50 points), after a 3.4 percent increase (plus 1.66 point) and down from the 4.8 percent gain posted a year earlier.

The Bank of Japan is expected to maintain its policy stance next week. At its March 18-19 meeting, the bank's nine-member board decide 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, its first rate hike in 17 years, as part of its gradual process of normalizing monetary policy. Subsequent rate hikes are expected to be at a slow pace as policymakers wish to ensure that Japan will not slip back into deflation.

In fiscal 2023 that ended last month, the core CPI rose 2.8 percent after rising 3.0 percent in the previous year. The pace of increase was the same as 2.8 percent, the median forecast by the BoJ board provided in the bank's quarterly Outlook Report released in January. The board forecast inflation measured by the core CPI will slow to 2.4 percent in fiscal 2024 and 1.8 percent in fiscal 2025. It will update its projections next week.

Econoday's Relative Performance Index stands at plus 15, above zero, which indicates the Japanese economy is performing a bit better than expected after having outperformed by a wide margin recently. Excluding the impact of inflation, the RPI is at plus 33 to indicate clear outperformance for the real economy.

Consumer inflation in Japan is expected to decelerate in two key measures in March as food supplier markups continued to ease, offsetting the upward pressure from a slower pace of decline in energy costs after the base effect of utility subsidies had waned.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan, is forecast to rise 2.6 percent on year after accelerating to 2.8 percent in February from a 22-month low of 2.0 percent in January. Underlying inflation measured by the core-core CPI (excluding fresh food and energy) is expected to moderate further to a 15-month low of 3.0 percent from 3.2 percent. By contrast, the year-over-year increase in the total CPI is forecast at a five-month high of 2.9 percent after rising to 2.8 percent in February from a 22-month low of 2.2 percent the previous month.

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.