Consumer inflation in Japan eased to a six-month low of 2.3% in the core reading in October (vs. consensus 2.2%) to match the 2.2% annual rate in April, decelerating from 2.4% in September and 2.8% in August. The government's temporary revival of utility subsidies for suppliers is lowering electricity and natural gas bill payments from September until November but its effects were somewhat offset by higher costs for processed food amid rice shortages.

The year-on-year rise in the CPI was also fueled by higher property insurance costs and the markup in subscription fees to NHK public broadcaster that took effect on Oct. 1.

Ruling party officials are considering resuming a similar scheme nearly next year to help ease the pain of many households hit by high costs for necessities for more than two years in light of the pandemic-era global supply chain breakdown and Russia's war in Ukraine.

The year-on-year increase in the total CPI stood at 2.3%, down from 2.5% in September, as expected. Underlying inflation measured by the core-core CPI (excluding fresh food and energy) was 2.3%, up from 2.1% the previous month, as this relatively younger series is unaffected by energy prices and reflects higher labor costs.

The CPI increase was led by higher costs for processed food +3.8% y/y (+0.92 point contribution) in October vs. +3.1% (+0.73 point) in September, overall energy +2.3% (+0.17 point) in October vs. +6.0% (+0.44 point) in September, property insurance premiums +7.0% (+0.09 point) vs. +2.7% +0.02 point) and subscription to NHK public television unchanged (zero contribution) vs. -10.2% (-0.4 point).

Consumer inflation in Japan is expected to ease further to 2.2% in the core reading in October from 2.4% in September and 2.8% in August. The government's temporary revival of utility subsidies for suppliers is lowering electricity and natural gas bill payments from September until November. Ruling party officials are considering resuming a similar scheme earlhy next year to help ease the pain of many households hit by high costs for necessities for more than two years in light of the pandemic-era global supply chain breakdown and Russia's war in Ukraine.

The year-on-year increase in the total CPI is forecast at 2.3%, also down from 2.5% in September. By contrast, underlying inflation measured by the core-core CPI (excluding fresh food and energy) is seen at 2.3%, up from 2.1% the previous month, as this relatively younger series is unaffected by energy prices.

The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for at least three more 25 basis point rate hikes that would take the overnight interest rate target to 1% by late 2025 as part of its gradual normalization process after more than a decade of large-scale easing. The reflationary policy mix of massive cash injections into the financial system by the central bank, increased fiscal spending and promises of growth strategies was used by the late former prime minister Shinzo Abe, whose pet project was to rewrite Japan's post-WWII pacifist constitution, to take his conservative Liberal Democratic Party back to power in a sweeping win in general elections in late 2012.

The LDP has been criticized by advocates for improving the livelihood of lower to middle income households since the inception of what they call a"misguided" massive printing of banknotes. A series of short-lived governments under the ruling coalition, which became a minority government in general elections about three weeks ago, have also come under fire for resorting to band-aid solutions of cash handouts and business subsidies, instead of formulating more effective programs to support women joining or going back to work and helping unemployment among the youth and those near retirement.

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.