Japan: Inflation ran at 2.6% in July

Inflation in Japan rose again in July, running at its fastest pace in seven-and-a-half years as fuel and raw material prices hit household incomes.

In particular, the Consumer Price Index rose 2.6% year-on-year last month, moving faster than economists’ estimates of a 2.2% increase, but also higher than the Bank of Japan’s 2% target.

In a sign of widening inflationary pressures, the so-called “structural” gauge that excludes not only volatile fresh food prices but also energy prices also rose in July at the fastest annual rate in more than six years.

The core index, excluding fresh food prices, rose 2.4% year-on-year in July, in line with analysts’ consensus estimates, but moving at the fastest pace since December 2014, excluding the impact of inflation of sales tax.

Core inflation, which excludes both fresh food and energy prices, rose 1.2% last month on an annual basis, the fastest pace since December 2015.

But even as the consumer price index continues to run above the 2% target for a fourth consecutive month, the Bank of Japan will likely keep monetary conditions ultra-loose as price increases remain modest compared to other major economies.

“Food prices and a weak yen were the main culprits behind the acceleration in inflation,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, adding that he expects core inflation to reach 3 percent this year.

“As wage growth undermines inflation, price increases will weigh on real wages, squeezing household purchasing power,” he added, predicting the BOJ would keep monetary policy unchanged in 2023 and 2024.