Japan's annual consumer inflation ticked up on year in October, driven by higher auto insurance premiums, hotel charges and durable goods, offsetting slower processed food cost gains and subdued energy prices. The CPI data showed wage growth is slowly spreading through services prices but still behind goods inflation.

--Core CPI (excluding fresh food) +3.0% y/y, 50th straight rise (Sept +2.9%); median forecast +3.0%
--Total CPI +3.0% y/y, 50th straight rise (Sept +2.9%); median forecast +3.0%
--Core-core CPI (ex-fresh food, energy) +3.1% y/y, 43rd straight rise (Sept +3.0%); median forecast +3.1%
--Processed food +7.2% (+1.74 point) vs. +7.6% (+1.83 pt) in Sept
--Energy prices +2.1% y/y (+0.16 point) vs. +2.3% (+0.17 pt) in Sept
--CPI services (ex-owners' equivalent rent) +2.2% vs. +2.0% in Sept; goods (ex-fresh food) +4.4% vs. +4.4% in Sept

Consumer inflation in Japan is forecast to have accelerated in two key measures for the second straight month in October after the Tokyo metropolitan government finished its free base charge for water bills at the end of September as planned. The program was aimed at easing the pain of households that have been hit by elevated costs for food, energy and other necessities.

The core reading (excluding fresh food) is forecast to show a 3.0% rise on the year, after the annual rate rose to 2.9% in September from 2.7% in August, but that would still just under 3.1% seen in July.

The year-on-year rise in the total CPI is also seen rising to 3.0% from 2.9% in September and 2.7% previously. The underlying inflation measured by the core-core CPI (excluding fresh food and energy) is estimated at 3.1% after having slowed to 3.0% in September from 3.3% in August.

Japanese officials are looking for signs of sustained wage hikes by companies so that households can tide over sticky inflation. The Bank of Japan has been careful about raising interest rates as part of its policy normalization process as Japan’s economic recovery remains modest amid sluggish domestic demand and weaker exports hit by stiff U.S. import duties.

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.