— Gasoline, Heating Oil, Utilities Costs Up Sharply Amid Rising Energy Markets
— Total CPI Marks 2nd Straight Y/Y Gain; Slower on Fresh Food Price Drop
— Producer Price Spike Has Limited Impact on CPI But BOJ Sees Gradual Pickup
By Max Sato
(MaceNews) – Core consumer prices in Japan maintained a small step upward in October as rising costs for utilities, fuels and processed food amid pandemic-caused supply shortages offset the dampening effect of deeper mobile phone user fee discounts initially led by the previous government, data from the Ministry of Internal Affairs and Communication released Friday showed.
The pace of gasoline and heating oil price increases picked up in October as OPEC and its allies refrained from boosting crude oil output sharply while electricity charges also rose at a faster pace and city gas prices reversed earlier drops to show a solid gain.
Prices for dairy products, bread, coffee and utilities were raised in Japan on Oct. 1, reflecting a recent surge in material costs. This will help push the annual inflation rate from near zero but if companies continue passing higher costs onto consumers, it would also dampen consumption amid slow wage growth.
The base effect of higher property insurance premiums as well as double-digit hotel fee gains in reaction to last year’s subsidized discounts eased the downward pressure from low-cost monthly data plans introduced in April by major mobile phone carriers and additional cheaper plans for low data usage offered in recent months.
The key points from CPI data:
* The underlying inflation rate – measured by the core-core CPI (excluding fresh food and energy) – marked the seventh straight drop, down 0.7% on year, after falling 0.5% in September. This narrow measure is not receiving support from the recent pickup in energy markets.
* The total CPI inched up 0.1% in October, as expected, after rising 0.2% in September, which was the first year-over-year gain in 13 months. Volatile fresh food prices fell 1.1% on year and pushed down the overall index by 0.04 percentage point after rising 2.2% (minus 0.09 point) the previous month.
* Among key components of the CPI basket of goods and services: Energy jumped 11.3% y/y (+0.79 percentage point contribution) in October vs. +7.4% (+0.52 point) in September; gasoline +21.4% y/y (+0.38 point) vs. +16.5% (+0.30 point); electricity +7.7% (+0.25 point) vs. +4.1% (+0.14 point); food excluding perishables +0.7% (+0.17 point) vs. +0.6 (+0.14 point).
* The base effect remains at least until March next year: Mobile communications fees plunged 53.6% y/y (minus 1.47 percentage points) in October vs. -44.8% y/y (-1.23 percentage points) in September.
* Household durable goods price gains have tamed: +0.1% y/y (+0.00 point contribution) in October vs. +3.0% (+0.04 point) in September. Demand for electric appliances and furniture is firm but some households have already purchased necessary items for working from home.
* Accommodations jumped 59.1% y/y (+0.35 point contribution) in October vs. +43.1% (+0.28 point) in September. The recent sharp increase was in reaction to the launch of the government’s “Go To Travel” program in late July 2020 to subsidize hefty discounts on hotel stays and transportation costs aimed at supporting the tourism industry. It has been suspended since late December amid criticism that it had caused a spike in coronavirus cases, but the government is considering resuming it now that the number of new coronavirus cases has fallen from the summertime peak triggered by the Delta variant.
PPI Impact on CPI Limited
Many Japanese firms tend to maintain employment during an economic downturn, and this trend has been in place even during the pandemic, partly thanks to financial support from the government.
“This contrasts with U.S. firms, which conducted large-scale job cuts and layoffs immediately after the outbreak of COVID-19,” Bank of Japan Governor Haruhiko Kuroda said in a speech to business leaders in Nagoya, central Japan, on Monday. “Labor hoarding has enabled Japanese firms to maintain capacity to swiftly increase supply even when demand has risen due to the resumption of economic activity.”
“When Japanese firms face supply-side constraints, they rarely announce price rises or allocate limited goods by giving preference to customers who are tolerant of higher prices,” Kuroda explained. “Instead, they tend to put priority on long-term relationships with the customers and try to meet their demand as much as possible by keeping selling prices unchanged while asking for understanding regarding delivery delays.”
BOJ Still Sees Gradual CPI Pickup
But the governor pointed to a shift in price-setting patterns among food producers and service firms that have been passing cost increases of raw materials on to consumers.
“In addition, some firms in the services industry have started trying to set their prices in accordance with demand while employing the method of dynamic pricing, through which higher prices are charged at a time of increased demand,” he said.
Inflation expectations among households and business have moved up, recovering to the pre-pandemic level, while industries with labor shortage are raising wages gradually, he noted.
Kuroda repeated the BOJ’s latest outlook that the year-on-year rate of change in the CPI is likely to increase moderately in positive territory in the near term while specifically projecting that prices will pick up gradually to about 1% “as the output gap turns positive around the middle of next year.”
Later at an in-person news conference in Nagoya on Monday, Kuroda vowed to continue the bank’s accommodative monetary easing stance until inflation exceeds the BOJ’s 2% target and stabilizes around that level.
“We are not at all considering reducing the degree of monetary easing or cancelling it even when the inflation rate reaches 1%,” he said.