QuestionWhat are the factors on which the Bank bases its assessment of prices?
The Background section of the Outlook for Economic Activity and Prices (Outlook Report) provides a detailed explanation of the Bank's assessments of economic activity and its outlook. Referring to the Outlook Report, the following describes the factors on which the Bank bases such assessments.
"II. Current Situation of Prices and Their Outlook" in the Background section of the report assesses developments in prices and their outlook based on various price statistics. Price statistics/indices show the overall value of goods or services, and act as a "mirror" or a "thermometer" that measures the conditions of the economy. This is because, in general, each good/service has its own price that reflects the supply-demand balance of that good/service. At the same time, changes in prices significantly affect economic activity.
It must be noted, however, that there are many prices set for each good/service, depending, for example, on whether it is traded among firms or between firms and individuals. For instance, the consumer price index (CPI) measures movements in prices of goods and services purchased by households. The corporate goods price index (CGPI) measures the price developments of goods traded in the corporate sector, and the services producer price index (SPPI) measures movements in prices of service products traded in the corporate sector. In addition to these indices, the Bank pays attention to various developments, including those in international and domestic commodity prices (for example, of crude oil, nonferrous metals, and agriculture, forestry and fishery products traded in the markets) and makes a comprehensive analysis of price movements in Japan.
The Bank set the "price stability target" at 2 percent in terms of the year-on-year rate of change in the CPI in January 2013, and has made a commitment to achieving this target at the earliest possible time. Therefore, the Bank pays particular attention to developments in the CPI. It must be noted, however, that the CPI is affected by various factors in the short term, and in the conduct of monetary policy, it is vital for the Bank to remove temporary disturbances and capture the underlying trend of inflation. Given this, the Bank pays particular attention to developments in the CPI for all items less fresh food and the CPI for all items less fresh food and energy, both of which are released by the Statistics Bureau of the Ministry of Internal Affairs and Communications. In addition, the Bank compiles various indicators, such as the diffusion index of increasing/decreasing items, trimmed mean, mode, and weighted median -- which are released every month in the Research Data series "Measures of Underlying Inflation" -- and makes use of them in analyzing the underlying trend of consumer prices.
When it is better to exclude direct effects of changes in the consumption tax rate on prices, the Bank conducts its analysis on a basis that excludes such effects (for details, see Explanation and Related Materials of "Measures of Underlying Inflation" ).
In assessing the outlook for prices, the output gap is one of the important indicators. The output gap represents the balance between the growth in potential supply -- as determined by capital stock and the labor force (for details, see the Research Data series "Output Gap and Potential Growth Rate") -- and final demand. Developments in inflation expectations -- that is, people's outlook for prices, or their perception of future price developments -- are another important factor. It is also necessary to pay due consideration to how prices are affected by factors such as changes in foreign exchange rates and international commodity prices, developments in wages, and changes in the price-setting behavior of firms.