JAPAN SEPT CORE CPI (EXCLUDING FRESH FOOD) +2.9% Y/Y, 49TH STRAIGHT RISE (AUG +2.7%); MEDIAN FORECAST +3.0%

JAPAN SEPT CORE INFLATION ACCELERATES AS ENERGY PRICES RISE ON YEAR INSTEAD OF FALLING; PROCESS FOOD PRICES GAIN EASES

JAPAN SEPT TOTAL CPI +2.9% Y/Y, 49TH STRAIGHT RISE (AUG +2.7%); MEDIAN FORECAST +2.9%

JAPAN SEPT CORE-CORE CPI (EX-FRESH FOOD, ENERGY) +3.0% Y/Y, 42TH STRAIGHT RISE (AUG +3.3); MEDIAN FORECAST +3.1%

JAPAN SEPT CPI: PROCESSED FOOD +7.6% (+1.83 POINT) VS. +8.0% (+1.90 PT) IN AUG

JAPAN SEPT CPI: ENERGY PRICES +2.3% Y/Y (+0.17 POINT VS. -3.3% (+0.27 PT) IN AUG

JAPAN SEPT CPI SERVICES (EX-OWNERS' EQUIVALENT RENT) +2.0% VS. +2.1% IN AUG; GOODS (EX-FRESH FOOD) +4.4% VS. +3.8% IN AUG

JAPAN SEPT CPI: WAGE GROWTH STILL BEHIND HIGH COSTS FOR DAILY PROCESSED FOOD, UTILITIES

Consumer inflation in Japan is expected to show a technical uptick to around 3% in two key measures in September after three months of easing, led by a year-on-year increase in overall energy costs which is triggered by a sharp slowdown in subsidized electricity price gains in September 2024.

The core reading (excluding fresh food) is forecast to post a 3.0% rise on year in September after its annual rate decelerated to 2.7% in August from 3.1% in July from 3.3% in June and the recent peak of 3.7% in May which had reflected the impact of summertime utility subsidies. The year-on-year rise in the total CPI is seen at 2.9%, up from 2.7% the previous month. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is estimated at 3.1% after having slowed to 3.3% in August from 3.4% in July.

In the bigger picture, however, there are two opposing forces in place. The year-on-year rise in processed food prices has been easing after an earlier spike on protracted domestic rice shortages. Rebounds of government release of its reserves of older rice and shipments of fresh crops are estimated to have led regular prices of the national staple to about a 50% rise on year, slowing from over 100% (double) during their peak.

On the other hand, companies have been passing higher labor and import costs on to consumers in light of widespread labor shortages and the resulting need to attract qualified workers with higher wages and benefits as well as better working conditions. The yen has also given up its earlier, slight gains against the dollar and other currencies in the wake of a domestic political crisis. A firmer yen could lower import costs.

Also little changed in the trend is that the current consumer price rises are not fully backed by domestic demand, although wage-heavy services price hikes have been playing catch-up with gains in goods prices.

This means that if the majority of the Bank of Japan’s nine board members consider a further hike from the current, still low policy rate of 0.5%, it would be their careful process of normalizing its accommodative policy stance that had kept short-term interest rates in a range of zero to slightly negative until March 2024.

The BOJ is expected to stand pat at its Oct. 29-30 meeting. Many economists expect the bank to take action in December at the earliest and more likely in the early parts of 2025. It last raised the target for the overnight interest rate by 25 basis points (0.25 percentage point) in January 2025.

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.