By Leika Kihara
TOKYO, Aug 21 (Reuters) – Japan’s core consumer inflation accelerated in July from a year earlier as firms passed on rising import costs from a weak yen and the U.S.-Israeli war with Iran, data showed on Friday, bolstering the case for an interest rate hike from the central bank.
The data will be among factors the Bank of Japan will scrutinise at its next policy meeting on September 17 and 18, when it is widely expected to raise its key rate to 1.25% from 1%.
The core consumer price index, which includes energy-related items but excludes volatile fresh food prices, rose 1.8% in July from the same month a year earlier, matching a median forecast.
It followed a 1.6% rise in June and remained below the BOJ’s 2% target for a seventh successive month, due largely to the effect of government subsidies aimed at curbing fuel costs.
Analysts expect core inflation to accelerate beyond the BOJ’s target in the coming months as the transfer of raw material costs, which led to a spike in wholesale inflation, broadens.
“Core consumer inflation is likely to re-accelerate given renewed tension in the Middle East, which will push up crude oil prices and add to price pressures from a weak yen,” said Masato Koike, senior economist at Sompo Institute Plus, adding that he expects the BOJ to raise interest rates in September.
An index that strips out both volatile fresh food and fuel prices, which is closely watched by the BOJ as a clearer gauge of underlying inflation, rose 1.9% in July from a year earlier after a 1.7% gain in June.
While far more moderate than a 2.7% year-on-year rise in goods prices, service-sector inflation perked up to 1.2% in July from 1.1% in June, in a sign firms were gradually passing on rising labour costs from a tight job market, the data showed.
After raising its key interest rate to a 31-year high of 1% in June, the BOJ kept monetary policy steady in July but issued its strongest comments to date about mounting inflation risk.
Sources have told Reuters that the BOJ is set to raise the rate as soon as September and is considering hiking more aggressively thereafter from the current pace of roughly two times a year.
A recent spike in wholesale inflation, which reached 7.2% in July from a year earlier, has highlighted mounting price pressure from the Middle East conflict that will likely push up consumer prices with a lag, analysts said.
“Companies are passing on costs more aggressively than in the past,” said Taro Saito, an economist at NLI Research Institute, who predicts price hikes for food and daily necessities to intensify later this year.
“We expect core consumer inflation to accelerate above 2% around autumn and exceed 3% toward the March 2027 end of the current fiscal year,” he said.
(Reporting by Leika Kihara; Editing by Thomas Derpinghaus, Jamie Freed and Christopher Cushing)
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