Consumer inflation in Japan moderated in all three key measures in April in light of easing food and durable goods supplier markups, offsetting the slight upward pressure from the first rise in energy costs in many months after the base effect of utility subsidies had waned earlier this year and global commodities markets were on the rise again.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan for its policy stance, rose at the slowest pace in three months, up 2.2 percent on the year, after a 2.6 percent gain in March, in line with the consensus call of a 2.2 percent increase. The year-over-year increase in the total CPI continued easing to 2.5 percent from 2.7 percent despite faster fresh food price rises, coming in just above the median forecast of a 2.4 percent rise.

Underlying inflation measured by the core-core CPI (excluding fresh food and energy) decelerated to a 19-month low of 2.4 percent from 2.9 percent, also above the median forecast of a 2.5 percent rise. The annual rate for this narrow indicator had been at or above 3.0 percent from December 2022 until February 2024.

Consumer inflation in Tokyo, the leading indicator of the national average, decelerated much faster than expected in April as completely free high school education took effect in the Tokyo Metropolitan area in the month, but its impact on the national CPI was limited.

Service costs have seen gradual upward pressures as many firms are offering higher wages to secure workers amid widespread labor shortages. Service prices excluding owners' equivalent rent rose 2.5 percent on the year in April, pushing up the total CPI by 0.79 percentage point, following increases of 2.9 percent (plus 0.94 point) in March and 3.1 percent in February. Goods prices excluding fresh food gained 2.6 percent (plus 1.28 points), after a 3.1 percent increase (plus 1.50 point) and down from the 3.4 percent gain in February.

As part of the process of normalizing its highly accommodative monetary policy, the Bank of Japan is expected to gradually raise the target for overnight interest rates in coming months. At its previous meeting in April, the bank's nine-member board decided in a unanimous vote to hold the short-term rate target steady in a range of zero to 0.1 percent, as widely expected, after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in a 7 to 2 vote in March.

Econoday's Relative Performance Index stands at plus 2, just above zero, which indicates the Japanese economy is performing largely as expected. Excluding the impact of inflation, the RPI is at plus 4.

Consumer inflation in Japan is expected to decelerate in all three key measures in April as food and beverage markups continued easing and hotel fee gains shrank, offsetting the upward pressure from a slower decline (or a slight rise) in energy costs after the base effect of utility subsidies waned earlier this year and global commodities prices rose. Tokyo CPI, the leading indicator, decelerated much faster than expected in April (the core reading fell to 1.6 percent from 2.4 percent) as completely free high school education took effect in the Tokyo Metropolitan area but its effect on the national average CPI is estimated to be limited.

The core CPI (excluding fresh food prices) is forecast to rise at a three-month low of 2.2 percent on year after moderating to 2.6 percent in March from 2.8 percent in February. Underlying inflation measured by the core-core CPI (excluding fresh food and energy) is expected to ease further to an 18-month low of 2.5 percent from 2.9 percent. The year-over-year increase in the total CPI is forecast at a three-month low of 2.4 percent after slowing slightly to 2.7 percent in March from 2.8 percent the previous month.

The Bank of Japan is expected to gradually raise its still super low overnight interest rate target as part of the process of normalizing its large-scale easing stance, looking beyond fiscal 2024 toward stable inflation around its 2 percent target that comes with sustainable economic and wage growth.

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.