–Energy, Food Prices Lead Inflation; BOJ Still Sees Commodities Spike Easing in FY23
–Gasoline Price Markups Smaller on Govt Subsidies; Utilities Pick Up Pace Again
By Max Sato
The Bank of Japan’s monetary easing, in contrast to aggressive tightening by other major central banks, is adding to the yen’s weakness, and thus higher import costs, but at its two latest meeting on July 20-21, the BOJ board decided to maintain its super-low interest rate targets along the yield curve and large asset purchases, as expected, to help the economy fully recovery from the pandemic-caused slump.
At a post-meeting briefing, BOJ Governor Haruhiko Kuroda made it clear once again that the bank’s policymakers are “not considering raising interest rates at all” given the bank’s latest outlook that domestic inflation is unlikely to be anchored around its 2% target in the next few years.
The key points from the Tokyo CPI data:
* The core consumer price index (excluding fresh food) in the capital’s 23 wards rose 2.3% in July, slightly higher than the median economist forecast of a 2.2% rise and marking the 11th straight year-on-year rise after rising 2.1% in June, 1.9% in May and April and posting modest gains of 0.8% in March and 0.5% in February.
* The prices for both fresh and processed food, ranging from vegetables, fruits and fish to bread, grilled meat restaurants and cooking oil, continued pushing up consumer inflation higher while semiconductors shortages and logistical bottlenecks pushed up the prices for air conditioners, on-demand heat pumps and other appliances.
* Utilities charges were marked up again, pushing up the contribution of the overall energy price to the CPI while the pace of increase in gasoline prices from a year earlier continued easing. The government has been trying to cap retail gasoline price markups by providing subsidies to refineries.
* The pace of core CPI’s annual rate is now the fastest since December 2014, when the index rose 2.3% in the middle of a 12-month cycle of being boosted by a sales tax hike to 8% from 5% in April 2014 (the sales tax is currently at 10% after another rise in 2019). Excluding the direct impact of the sales tax increases in 2014 and 1997 (the latter to 5% from 3%), it is the highest since the 2.3% rise in October 1992.
* The core-core CPI (excluding fresh food and energy) – a key indicator of the underlying trend of inflation – rose 1.2% on the year in July for the fourth straight rise, also firmer than the median forecast of a 1.1% rise. It followed a 1.0% increase in June and the first year-on-year rise in 13 months in April with a 0.8% rise. This measure does not receive support from higher energy prices but it has been drifting higher in the face of markups in other items.
* The total CPI rose 2.5% on year in July, marking the 11th straight year-on-year gain, coming in higher than the median forecast of a 2.4% gain. It followed increases of 2.3% in June and 2.4% in both May and April. The 2.5% increase was the largest in over seven years since October 2014, when the index gained 2.5%. Excluding the direct impact of the sales tax hikes of 2014 and 1997, it is the highest inflation rate since June 1992, when the index also rose 2.5%.
* Fresh food prices, a volatile factor, continued rising, up 8.2% on year in July, pushing up the overall index by 0.31 percentage point, after an 8.8% rise and a 0.34-point contribution the previous month.
* Energy prices rose 23.5% on year in July, pushing up the total index by 1.13 percentage points. The pace of year-on-year increase accelerated for the first time in five months following a 21.7% rise (+1.04 points) in June. In March, the pace of increase decelerated for the first time during the current year-on-year rise period that began in July 2021 after nearly two years of decline.
* In the energy category, the pace of increase in gasoline prices decelerated further to 7.9% (+0.05 point contribution) from 11.1% (+0.06 point) in June, 11.6% (+0.07 point) in May and 14.3% (+0.08 point) in April. Electricity charges picked up the pace again, up 25.5% (+0.67 point) following increases of 22.3% (+0.59 point) in June, 23.0% (+0.60 point) in May and 25.8% (+0.65 point) in April. City gas prices rose 27.2% (+0.40 point), also firming from 25.4% (+0.37 point) in June and 25.8% (+0.37 point) in May, and returned the pace in April at 27.6% (+0.39 points) in April.
* Food excluding perishables gained 3.6% (+0.77 point contribution) in July after rising 3.1% (+0.66 point) in June. The pace of increase continued to accelerate as more companies are trying to pass surging producer costs onto consumers. Global supply conditions remain tight and the depreciation of the yen is also pushing up import prices.
* The prices for household durable goods rose 4.3% on year and pushed up the CPI by 0.05 percentage point in July after surging 9.1% (+0.10 point) in June and rising 7.3% (+0.08 point) in May. Global logistical bottlenecks continue but there is some easing in supply delays. The prices of durable goods posted the first year-on-year rise in six months in April, when they rose 5.5% and added 0.06 point to the total index, after a 1.1% dip (-0.01 point) in March and a 4.1% slump (-0.05 point) in February.
* A new factor behind the higher CPI in July was mobile phone handset prices, which rose 14.7% on year with a 0.10-point positive contribution, compared to a 2.3% rise (+0.01 point) in June.
* Accommodations costs rose just 0.2% on year in July (zero point contribution) after rising 3.6% (+0.04 point) in June, 5.2% (+0.06 point) in May and 6.1% (+0.07 point) in April. The pace slowed sharply to 0.6% (+0.01 point) in January from +44.0% (+0.35 point) in December. The government suspended its controversial ‘Go To Travel’ campaign in late December 2020 after seeing a spike in coronavirus cases and has been cautious about resuming it. The program was launched in July 2020 to subsidize hefty discounts on hotel fees and domestic transportation costs.
* The downward pressure from sharp discounts on mobile communications fees that began in April 2021 has already waned. The prices for this service fell 21.0% on year (a negative 0.28 point contribution) in July after falling 22.5% (-0.28 percentage point) in June, but smaller than the 52.7% plunge (-1.08 points) in March.