–Utility Subsidies, Reduced Renewable Energy Surcharge Ease Inflation
–Total CPI +3.2% Y/Y, Also Slower Than +3.5% Y/Y in April, 41-Year High of +4.3% in January
–Core-Core CPI (Ex-Fresh Food, Energy) Annual Rate Creeps Up to 4.3%, Nearly 42-Year High
By Max Sato
(MaceNews) – Consumer inflation in Japan eased back to just above 3% in May in both the total and core indexes as utility and gasoline subsidies continued to cap already easing energy costs while widespread markups for processed food pushed up the narrow measure to a fresh 41-year high, data from the Ministry of Internal Affairs and Communication released Friday showed.
Energy prices fell further also because the government lowered the renewal energy promotion surcharge on electricity bills for fiscal 2023, effective in April, which was reflected in bills due in May.
The Bank of Japan’s policy board maintained its monetary easing stance at its meeting on June 15-16, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to guide inflation toward the stable 2% target with sustained wage growth.
The key points from CPI data:
* The national average core Consumer Price Index (excluding fresh food) rose 3.2% from a year earlier in May, slightly firmer than the median economist forecast for a 3.1% rise. It is the 21st straight year-over-year increase after rising 3.4% in April, 3.1% in both March and February (the first deceleration in 13 months), 4.2% in January and 4.0% in December.
* The 4.2% rise in January is a 41-year high, the largest increase since the 4.2% gain in September 1981, with or without the direct impact of the sales tax hikes in 2014 (from 5% to 8%) and in 1997 (from 3% to 5%) and the introduction of the sales tax in 1989. The tax was further raised to 10% in 2019 but had only a limited impact on prices.
* Service prices in Japan have moved up in recent months as more firms are raising wages to secure workers, although the average cash earnings per employee are falling in real terms. Service prices excluding owners’ equivalent rent rose 2.5% on the year in May, up from a 2.4% increase in April. Goods prices excluding fresh food gained 4.6%, slowing from a 5.1% rise the previous month.
* The BOJ board has projected that the increase in the core CPI would slow to 1.8% in fiscal 2023 from 3.0% in fiscal 2022 that ended in March as the base effects of last year’s spike in energy and commodities prices fade. For fiscal 2024, the board expects the core reading to rise 2.0%, noting the impact of government subsidies to cap retail gasoline and utility prices will wane. But its forecast for 2025 is a lower 1.6%, indicating the banks’ battle to reflate the economy may be prolonged.
* The underlying inflation rate – measured by the core-core CPI (excluding fresh food and energy) – rose to a fresh 41-year high of 4.3% on year in May, accelerating further from 4.1% in April, 3.8% in March and 3.5% in February. It was the 14th straight year-over-year increase and just above the median economist forecast for a 4.2% rise. The 4.3% rise is the largest in nearly 42 years, since the 4.5% increase June 1981. This narrow measure is without the effects of energy cost fluctuations. It has been pushed up by markups in various items including processed food.
* The total CPI rose 3.2% on year in May, marking the 21st consecutive year-over-year increase, after rising 3.5% in April, 3.2% in March, 3.3% in February and 4.3% in January. It was also above the median forecast of a 3.2% rise. Fresh food prices, a volatile factor, rose 5.2% on year and pushed up the overall index by 0.22 percentage point after rising 5.3% (up 0.22 point) the previous month. The 4.3% increase January’s total CPI is a 41-year high, the largest since the 4.3% rise in December 1981.
* Among key components of the CPI basket of goods and services, energy prices slumped 8.2% on year in May, pushing down the CPI by 0.69 percentage point, after falling 4.4% with a negative 0.37-oint contribution to April, falling 3.8% (minus 0.32 point) in March and dipping 0.7% (minus 0.06 point) in February, which was the first drop since March 2021.
* The government has contained retail gasoline prices by providing subsidies to refineries. It also began providing subsidies for electricity and natural gas in January (reflected in February bills onward) and the program will continue through September. In addition, the government lowered the renewal energy promotion surcharge on electricity bills to ¥1.40 per kilowatt-hour for fiscal 2023, effective in April, from ¥3.45 in fiscal 2022. The official estimate is that a typical household that uses about 400 kilowatt-hours will pay around ¥820 less per month, or an annual decrease of ¥10,000.
* Gasoline prices fell 1.7% on year in May, making a negative 0.04 percentage point contribution to overall consumer prices, after falling 3.3% with a negative 0.08 percentage point contribution in March.
* Electricity charges dropped 17.1% (minus 0.69 point) in May after falling 9.3% (minus 0.36 point) in April, 8.5% (minus 0.32 point) in March and 5.5% (minus 0.21 point) in February, the first drop since July 2021, after rising 20.2% (plus 0.75 point) in January. The year-over-year increase in the prices for “city gas” (natural gas supplied through pipelines) continued slowing to 1.4% (plus 0.02 point) after rising from 5.0% (plus 0.06 point) in April, 10.0% (plus 0.11 point) in March, 16.6% (plus 0.17 point) in February and 35.2% (plus 0.35 point) in January.
* The prices for food excluding perishables, which has a large weight in the CPI basket, posted the 23rd straight year-over-year increase, up 9.2% (plus 2.07 points) after rising 9.0% (plus 2.02 points) in April. It is the largest increase in more than 46 years, since the 9.9% surge in October 1975. Sharp price hikes were seen among many items including prepared food (fried chicken), eating out (hamburgers), snacks (chocolate) and soft drinks.
* The prices for household durable goods (air conditioners, etc.) marked their 14th consecutive gain from year-earlier levels. The pace of increase decelerated to 9.0% (plus 0.13 point) from 9.8% (+0.14 point) in April and six months of double-digit percentage gains through February. Producer import prices fell on the year for the second straight month in May as global energy and commodities markets have eased and the yen’s weakness, which has eroded Japan’s purchasing power, is not as serious as in October last year.
* Accommodations, which have a relatively small weight in the CPI basket of goods and services, rose 9.2% in May, raising the CPI’s year-on-year increase by 0.0.9 percentage point in May, thanks to strong reopening demand for traveling and despite slight downward pressure from travel discount subsidies. Hotel fees rose 8.1% on the year in April, with a positive 0.08-point contribution, after slipping 0.6% with the a negative 0.01-point contribution in March.
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Contact this reporter: max@macenews.com
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