Consumer inflation in Japan inched up in two of the three key measures in June on reduced subsidies for electricity and natural gas supply, following a sharp rise in May when a hike in renewable energy fees was reflected in utility bills.

The core CPI (excluding fresh food prices), closely watched by the Bank of Japan for its policy stance, rose 2.6 percent on year in June after the pace of increase picked up to 2.5 percent in May from 2.2 percent in April, coming in just below the consensus call of a 2.7 percent increase. The year-over-year increase in the total CPI was steady at 2.8 percent in June after rising to 2.8 percent in May from 2.5 percent in April, also slightly lower than the median forecast of a 2.9 percent rise.

The core-core CPI (excluding fresh food and energy), a key indicator of underlying inflation, edged up to 2.2 percent, as expected, after easing to a 20-month low of 2.1 percent in May from April's 2.4 percent. The annual rate for this narrow indicator had been at or above 3.0 percent from December 2022 until February 2024.

The combined upward pressure from energy and durable goods in June (0.08 point higher than in May), the latter of which was boosted by a jump in air conditioners amid hot weather, offset the downward effect (0.08 lower than in May) of easing processed food markups.

Overall energy prices gained 7.7 percent on year in June, pushing up the CPI by 0.59 percentage point, after rising 7.2 percent in May with a positive 0.54-point contribution while the prices for durable goods jumped 3.9 percent (plus 0.06 point) after a 1.9 percent rise (plus 0.03 point). By contrast, the increase in food prices excluding perishables continued to ease to 2.8 percent in June from 3.2 percent in May but this category remains the largest contributor, raising the CPI by 0.68 point, although it is smaller than plus 0.76 point seen the previous month.

Services costs have lost some steam after having led overall inflation earlier. Large firms are raising wages to secure workers amid labor shortages but some smaller firms cannot afford to catch up and regulated wages for medical, welfare and education workers remain low, which is keeping underlying inflation tame and thus leaving the BoJ cautious about raising interest rates. The bank monitors various price data and anecdotal evidence and makes a"comprehensive" judgement on underlying inflation. Governor Kazuo Ueda has said it is still below the price stability target of 2 percent but that it"seems to be on a rising path toward 2 percent."

Service prices excluding owners' equivalent rent rose 2.4 percent on the year in June, pushing up the total CPI by 0.78 percentage point, following a 2.2 percent rise (plus 0.71 point) in May. Goods prices excluding fresh food gained 3.5 percent (plus 1.70 points) after a 3.5 percent rise (plus 1.69 points) in May and a 2.6 percent gain (plus 1.28 point) in April. Utility costs had marked a hefty increase in May after falling for more than a year.

The BoJ board is expected to cautiously raise the overnight interest rate target, with its next move possibly in September but not in July. At its latest meeting on June 13-14, the nine-member board decided in a unanimous vote to hold the overnight interest rate target steady in a range of 0 percent to 0.1 percent for the second straight meeting after conducting its first rate hike in 17 years and ending the seven-year-old yield curve control framework in March. The board also decided in an 8 to 1 vote in June to set the stage for gradually reducing the bank's large purchases of Japanese government bonds for the next year or two years"to ensure long-term interest rates would be formed more freely in financial markets." It will work out a specific plan at its July 30-31 meeting after bank officials have compared notes with market participants.

Econoday's Relative Performance Index stands at minus 17, below zero, which indicates the Japanese economy is performing slightly worse than expected after underperforming with a smaller margin. Excluding the impact of inflation, the RPI is at minus 12. The economy is expected to post a modest rebound in the April-June quarter after marking the first contraction in two quarters in January-March.

Consumer inflation in Japan will accelerate in all three key measures in June on the effects of reduced subsidies for electricity and natural gas, following a sharp rise in May when a hike in renewable energy fees was reflected in utility bills. The core CPI (excluding fresh food prices), key to the Bank of Japan's policy stance, is forecast to rise 2.7 percent on year after the pace of increase picked up to 2.5 percent in May from 2.2 percent in April. The year-over-year increase in the total CPI is forecast at 2.9 percent in June, up slightly from 2.8 percent the previous month. Underlying inflation measured by the core-core CPI (excluding fresh food and energy) is also expected to edge up to 2.2 percent after easing to a 20-month low of 2.1 percent in May from April's 2.4 percent.

The government halved subsides for electricity and natural gas supplied to households and businesses in May that was reflected in June utility bills. The program to help cushion the impact of elevated energy costs that began at the start of 2023 was terminated at the end of June 2024, which will push up energy costs further in July CPI data. Meantime, the government has decided to revive a similar scheme for three months ending in October when high temperatures are expected to boost the use of air conditioners.

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.