In my previous post, I argued that the true yardstick for fiscal discipline should not be the debt-to-GDP ratio or the amount of government debt per capita. Instead, it should be the intensity of inflation concerns. However, it’s not as simple as tracking a single data point. In this series, I want to introduce several key statistics, starting with the Consumer Price Index (CPI).
The CPI is undeniably a primary indicator for referencing inflation. It is the very metric the Bank of Japan (BoJ) uses for its target of a stable 2% increase.
The Complexity of the CPI
The “CPI” is not just one number. There are several versions:
- Headline CPI: The overall index.
- Core CPI: Excluding fresh food.
- Core-core CPI: Excluding both fresh food and energy.
- Flash Estimates: Such as those for the Tokyo metropolitan area.
Since fresh food prices are at the mercy of the weather and energy prices fluctuate with global resource markets, the core-core index is generally a better tool for judging underlying trends. The BoJ itself notes that rather than clinging to a specific core indicator, it is more effective to capture underlying price shifts by looking at various metrics comprehensively. To that end, they also monitor the “diffusion index,” “trimmed mean,” “mode,” and “weighted median.” Clearly, evaluating the CPI is far from straightforward.
Levels vs. Rates: What People Get Wrong
The BoJ’s target is a 2% rate of increase, not a specific price level. I often browse online comment sections as a bit of a hobby, and it’s striking how many people seem to miss this distinction.
Another crucial caveat: what matters most isn’t the immediate performance, but whether the rate will “remain stable in the future.” Annual CPI growth was +2.5% in 2022 and +3.2% in 2023 (Note 1). On the surface, it looks like we’ve hit the “stable 2%+” goal, but that’s a premature conclusion.
“Good” Inflation vs. “Bad” Inflation
Inflation is generally split into cost-push (driven by rising production costs) and demand-pull (driven by increased demand). The government and the BoJ are specifically aiming for the latter.
However, the price hikes since 2022 have been textbook cost-push inflation. They were driven by a weak yen, soaring resource costs, and global inflationary pressure, all while wage growth continued to lag behind price increases. These external factors are cyclical (Note 2) and, frankly, not even desirable. In short, the actual goal of the government and the BoJ hasn’t been achieved at all.
Conclusion
There is a possibility that inflation-driven wage hikes will eventually outpace price increases, leading to a sustainable 2% CPI growth. But as of now (January 2024), the jury is still out. I’ll dive into wage statistics in a future post.
To wrap up: while the CPI is a vital metric that the government uses for its targets, looking at it in isolation tells you nothing. In fact, reacting only to the surface-level numbers can be dangerous. Arguing for interest rate hikes based solely on these figures is entirely off the mark. At the very least, the CPI should always be analyzed in tandem with wage data.
(Note 1) Based on the Ministry of Internal Affairs and Communications, “2020-Base Consumer Price Index, Japan, December 2023 and 2023 Average.” (Note 2) While currency and resource trends can last a long time, they typically move in multi-year cycles. Global inflation is currently on a downward trend due to monetary tightening (though whether it returns to pre-pandemic levels remains to be seen).
References: Bank of Japan, “Indicators for Capturing Underlying Inflation” (Accessed January 21, 2024) https://www.boj.or.jp/research/research_data/cpi/index.htm
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