–Energy, Food Prices Lead Inflation; BOJ Sees Impact of Commodity Prices Spike Fading in FY23
–Gasoline Price Markups Smaller on Govt Subsidies; Utilities Costs High but Also Easing
By Max Sato
The prices for both fresh and processed food, ranging from vegetables, fruits and fish to pre-cooked curry, Korean barbecues at restaurants and imported beef for cooking at home, continued pushing consumer inflation higher. Supply constraints that have been exacerbated by Covid lockdowns in China boosted prices for air conditioners and tankless water heaters among other appliances.
The costs for utilities and fuels remain elevated but the pace of their increase from a year earlier continued easing slightly from the previous month, leading to a smaller contribution of the overall energy price to the CPI in June. The government has been trying to cap retail gasoline price markups by providing subsidies to refineries.
At its latest meeting on June 16-17, the BOJ board decided to maintain its super-low interest rate targets along the nearly flat yield curve and large-scale asset purchase program to support economic recovery and lead inflation toward its stable 2% target, staying as a lone wolf while other major central banks are rushing to raise rates to tame inflation. In its quarterly Outlook Report for April, the board projected inflation will average just under 2% in fiscal 2022 before slipping back to around 1% in the next fiscal year as the impact of surging commodities prices fades.
The key points from the Tokyo CPI data:
* The core consumer price index (excluding fresh food) in the capital’s 23 wards rose 2.1% in June, in line with the median economist forecast of a 2.1% rise and marking the 10th straight year-on-year rise after rising 1.9% in May and April and posting modest gains of 0.8% in March and 0.5% in February.
* The pace of core CPI’s annual rate remains the fastest in just over seven years since March 2015, when the index rose 2.2% at the end 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 2.1% rise in November 1992.
* The core-core CPI (excluding fresh food and energy) – a key indicator of the underlying trend of inflation – rose 1.0% on the year in June for the third straight rise following a 0.9% increase in May 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 2.3% on year in June, marking the 10th straight year-on-year gain, but the pace was slower than the 2.4% rise in both May and April, as the recent spike in fresh food prices eased. It was below the median forecast of a 2.5% rise. The 2.4% 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 8.8% on year in June, pushing up the overall index by 0.34 percentage point, although the pace was slower than a revised 15.2% increase and a positive 0.57-point contribution the previous month.
* Energy prices rose 21.7% on year in June, pushing up the total index by 1.04 percentage points, after rising 22.3% in May (+1.05 points). 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. The pace of increase in gasoline prices decelerated further to 11.1% (+0.06 point contribution) from
11.6% y/y (+0.07 point) in May, 14.3% (+0.08 point) in April and +17.7% (+0.10 point) in March. Electricity charges also posted a slower rise after months of sharp gains, up 22.3% (+0.59 point) following increases of 23.0% (+0.60 point) in May, 25.8% (+0.65 point contribution) in April and +26.7% (+0.65 point) in March. City gas prices rose 25.4% (+0.37 point), easing from +25.8% (+0.37 point) in May, +27.6% (+0.39 points) in April and +29.5% (+0.40 point) in March.
* Food excluding perishables gained 3.1% (+0.66 point contribution) in June after rising 2.5% (+0.54 point) in May. 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.
* Amid lingering supply bottlenecks and extremely hot weather, the prices for household durable goods surged 9.1% on year and pushed up the CPI by 0.10 percentage point in June after rising 7.3% (+0.08 point) in May and posting 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. It followed a 1.1% dip (-0.01 point) in March and a 4.1% slump (-0.05 point) in February. Initial strong demand for electric appliances and furniture arising from the stay-at-home lifestyle has waned but retailers report low inventories and delayed shipments for various products.
* Accommodations costs rose 3.6% on year in June (+0.04 point contribution) after rising 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 22.5% on year (a negative 0.28 point contribution) in June after falling 22.5% (-0.29 percentage point) in May and April, but smaller than the 52.7% plunge (-1.08 points) in March.