| Consensus | Consensus Range | Actual | Previous | |
|---|---|---|---|---|
| CPI - Y/Y | 3.4% | 3.3% to 3.6% | 3.6% | 2.9% |
| Ex-Fresh Food - Y/Y | 2.9% | 2.9% to 3.1% | 3.0% | 2.7% |
| Ex-Fresh Food & Energy - Y/Y | 2.4% | 2.3% to 2.4% | 2.4% | 2.4% |
Highlights
Consumer inflation in Japan accelerated in two of the three key measures in December, with the core reading (excluding fresh food) rising to a 16-month high of 3.0% on year, a tick higher than the consensus call of +2.9%. It followed a jump to 2.7% in November from October's 2.3%. Three-month utility subsidies for peak time air conditioner use ended in November (bills were paid in December) while processed food prices remained high in protracted rice shortages.
The year-on-year increase in the total CPI surged to a 23-month high of 3.6% from 2.9% the previous month. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) stood at 2.4% after rising to 2.4% in November from 2.3% in October, staying at the highest since 2.4% in April 2024.
The CPI increase was led by higher costs for processed food +4.4% y/y (+1.06 point contribution) in December vs. +4.2% (+1.00 point) in November and overall energy +10.1% (+0.76 point) vs. +6.0% (+0.45 point). Cell phone charges posted their first y/y gain in many months, up 3.2% (+0.04 point) vs. a 0.2% dip (zero contribution), as the base year effects of frugal consumers switching to discount plans have waned.
Services costs minus owners' equivalent rent rose 2.3% on year in December, up slightly from +2.1% the previous month, while goods prices minus fresh food increased at a much higher pace of 4.3%, up from +3.7%. This indicates wage growth still lags behind the pace of increase in the costs for processed food and energy, and thus needs to accelerate further to anchor inflation in a sustainable manner.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for three more 25 basis point rate hikes (including what seems to be a done deal of +25 basis points later today) that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process after more than a decade of large-scale easing.
The year-on-year increase in the total CPI surged to a 23-month high of 3.6% from 2.9% the previous month. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) stood at 2.4% after rising to 2.4% in November from 2.3% in October, staying at the highest since 2.4% in April 2024.
The CPI increase was led by higher costs for processed food +4.4% y/y (+1.06 point contribution) in December vs. +4.2% (+1.00 point) in November and overall energy +10.1% (+0.76 point) vs. +6.0% (+0.45 point). Cell phone charges posted their first y/y gain in many months, up 3.2% (+0.04 point) vs. a 0.2% dip (zero contribution), as the base year effects of frugal consumers switching to discount plans have waned.
Services costs minus owners' equivalent rent rose 2.3% on year in December, up slightly from +2.1% the previous month, while goods prices minus fresh food increased at a much higher pace of 4.3%, up from +3.7%. This indicates wage growth still lags behind the pace of increase in the costs for processed food and energy, and thus needs to accelerate further to anchor inflation in a sustainable manner.
The Bank of Japan, which expects inflation to be anchored around its 2% target by early 2026, is on course for three more 25 basis point rate hikes (including what seems to be a done deal of +25 basis points later today) that would take the overnight interest rate target to 1% by late 2025 or early 2026 as part of its gradual normalization process after more than a decade of large-scale easing.
Market Consensus Before Announcement
Consumer inflation in Japan is expected to accelerate in two of the three key measures in December, with the core reading (excluding fresh food) seen up 2.9% on year after rising to 2.7% in November from October's 2.3%. Three-month utility subsidies for peak time air conditioner use ended in November while processed food prices remained high in protracted rice shortages.
The year-on-year increase in the total CPI is forecast at 3.4%, also up from 2.9% the previous month. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is seen at 2.4% after rising to 2.4% in November from 2.3% in October.
The year-on-year increase in the total CPI is forecast at 3.4%, also up from 2.9% the previous month. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is seen at 2.4% after rising to 2.4% in November from 2.3% in October.
Definition
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.
Description
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.
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.
