Breaking: 2.8% in October as Japan’s Tokyo CPI inflation rises

2.8% was the year-on-year rise in Tokyo’s headline Consumer Price Index (CPI) in October. That compares with 2.7% in the previous month, according to figures released on Friday by the Statistics Bureau of Japan.

Further updates to follow...

Inflation: Key Questions Answered

Inflation: The Basics

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline rate is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). To strip out more volatile components, such as food and fuel, core inflation excludes items whose prices can be affected by geopolitical developments and seasonal factors. Economists concentrate on this core measure. Central banks also target it under their mandate to maintain manageable inflation, typically around 2%.

Consumer Price Index (CPI): Measuring Price Changes

Changes in the cost 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 month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, which 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.

Inflation’s Effect on Foreign Exchange

Higher inflation generally lifts a country’s currency, while lower inflation has the reverse effect, however counter-intuitive that may seem. The link runs through interest rates: central banks normally raise them to curb elevated inflation. Those higher rates draw in more global capital from investors seeking attractive returns on their funds.

Gold Prices: The Inflation Link

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 severe market turmoil, but that behaviour is not typical in most circumstances. Elevated inflation prompts central banks to raise interest rates to bring price pressures under control. For Gold, higher rates are a headwind: holding the metal carries a greater opportunity cost than owning an interest-bearing asset or keeping funds in a cash deposit account. Conversely, lower inflation tends to support Gold by bringing interest rates down, making the precious metal a more attractive investment alternative.

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