© Reuters. FILE PHOTO – A customer buys food from a shop selling cooked food at a market in Tokyo, Japan March 24, 2023. REUTERS/Andronic Christodoulou
By Leika Kihara and Takahiko Wada
TOKYO (Reuters) – Japan’s core consumer price inflation rate beat expectations in May and an index excluding fuel costs rose at the fastest annual pace in 42 years, highlighting extended price pressures that will keep the central bank under pressure to phase out massive stimulus.
Analysts say the increase was driven by a steady rise in the prices of food and daily necessities, which indicates a consumption burden from the rising cost of living facing families.
Data on Friday showed that the nationwide core consumer price index, which excludes fresh food but includes energy items, rose 3.2% in May from a year earlier, slowing from 3.4% in April but beating market expectations for a 3.1% increase.
Core consumer inflation has now remained above the central bank’s 2% target for 14 consecutive months, casting doubt on his view that recent cost-driven inflation will be temporary.
“As the path of rising costs passes, core consumer inflation will peak in the summer,” said Ryosuke Katagi, market economist at Mizuho Securities.
“But companies may continue to pass on costs for longer than expected. Inflation risks tend to be to the upside.”
The so-called “core” index that strips out traces of both fresh food and fuel — which is closely watched by the Bank of Japan (BOJ) as a key gauge of demand-driven domestic price trends — rose 4.3% in May, accelerating from a gain of 4.1% in April, marking the largest increase since June 1981.
While energy costs fell 8.2% in May year on year due to the impact of government subsidies, food inflation accelerated to 9.2% last month from 9.0% in April as prices of goods ranging from fried chicken and hamburgers to chocolate rose.
The data showed that hotel room charges also jumped 9.2% in May, faster than the 8.1% increase in April, a sign that strong tourism demand is allowing operators to charge higher fees.
divergent policy change?
Services prices rose 1.7% year-on-year in May, slower than the 4.7% increase in goods prices, but flat from April in a sign that higher wages may start to fuel service inflation.
Analysts polled by Reuters expect the Tokyo core consumer price index, seen as a leading indicator of national trends, to rise 3.3% year-on-year in June after rising 3.2% in May.
The data increases the chance that the Bank of Japan will revise its rate forecasts at its next quarterly review in July, although an end to ultra-low interest rates is unlikely, analysts say.
“Although price pressures are widening, inflation remains largely supply-driven,” said Stefan Angrek, chief economist at Moody’s NYSE: Analytics.
“With an economy still smaller than it was before the pandemic, policy adjustments remain some way off.”
Some market players expect the Bank of Japan to adjust its yield control policy as early as July to address side effects such as distortions in the bond market.
Bank of Japan Governor Kazuo Ueda stressed the need to maintain a loose policy until inflation is sustainable at around 2% and accompanied by higher wages. He also said that core consumer inflation would slow below 2% by September or October, though persistently rising prices have called that view into question.
In its latest forecast in April, the Bank of Japan forecast core consumer inflation to reach 1.8% in the current fiscal year ending in March 2024. This is far less than the 2.6% increase expected in a Reuters poll in May.
