2.1%: Japan’s National CPI records a September increase

2.1% was September’s year-on-year increase in Japan’s National Consumer Price Index (CPI). That was up from the previous reading of 1.9%, according to the latest figures published on Friday by the Japan Statistics Bureau.

Further updates to follow...

Inflation: Key Questions

How is inflation measured?

A rise in the cost of a representative basket of goods and services is measured by inflation. The headline rate is generally reported as a percentage change, both month-on-month (MoM) and year-on-year (YoY). Stripping out more volatile components, including food and fuel, gives the core inflation rate. Those components can fluctuate with geopolitical developments and seasonal factors. Economists concentrate on core inflation, which is also the measure central banks target. Their mandate is to maintain inflation at a manageable rate, typically around 2%.

What does the Consumer Price Index (CPI) track?

Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The index is generally reported as a percentage change from the preceding month, or month-on-month (MoM), and from a year earlier, or year-on-year (YoY). Central banks target Core CPI because it removes volatile food and fuel components. A Core CPI reading above 2% typically leads to higher interest rates; a reading below 2% usually has the reverse effect. Higher rates support a currency, so rising inflation generally strengthens it. Falling inflation tends to have the opposite effect.

How does inflation affect exchange rates?

Higher inflation tends to strengthen a country’s currency, while lower inflation has the reverse effect, despite how counter-intuitive this may appear. To curb elevated inflation, the central bank normally increases interest rates. Those higher rates draw greater capital inflows from global investors seeking attractive returns on their money.

What does inflation mean for Gold prices?

Historically, investors sought Gold during periods of high inflation for its ability to retain value. They still often buy it as a safe haven during extreme market turmoil, but this is not generally the case outside such conditions. The reason is that central banks raise interest rates to counter high inflation. For Gold, higher rates are a headwind: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or cash in a deposit account. Lower inflation, by contrast, tends to support Gold. It brings interest rates down and makes the metal a more viable investment alternative.

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