The data underscores the challenge the Bank of Japan faces in juggling pressure from persistent food inflation against risks to the fragile economy from uncertainty over President Donald Trump’s trade policy.
The core consumer price index (CPI), which excludes volatile fresh food costs, rose 3.7% in May from a year earlier, data showed on Friday, exceeding market forecasts for a 3.6% gain and accelerating from a 3.5% increase in April.
A separate index that strips away the effects of both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better indicator of demand-driven price moves, rose 3.3% in May from a year earlier after a 3.0% rise in April.
The increase was driven by stubbornly high prices of food, excluding volatile fresh items like vegetables, with Japan’s staple rice seeing prices double in May from year-before levels.
While slower than the 5.3% increase in goods prices, service-sector inflation accelerated to 1.4% in May from 1.3% in April in a sign firms were steadily passing on labour costs.
“But today’s data shows anew that domestic inflation is heightening particularly that for goods. When looking just at price moves, conditions for additional rate hikes will likely stay in place throughout 2025,“ he said.
Food prices, excluding those of volatile fresh food, rose 7.7% in May from a year earlier, faster than the 7.0% gain in April, reflecting the pain households are feeling from rising living costs.
They have also stressed the need to go slow in raising rates because underlying inflation, which strips away such one-off factors and is driven by the strength of the economy, remains short of the BOJ’s 2% target.
“If our economic and price forecasts materialise, we expect to keep raising interest rates,“ Ueda told a speech on Friday.
While the BOJ keeps its focus on risks to growth from Trump’s tariffs, some analysts fret that food prices may keep rising longer than expected and lead to widespread inflation.
“Core consumer inflation will likely slow below 3% in August and below 2% early 2026. But the pace of slowdown could be more moderate than we expect,“ he said.
But minutes of the BOJ’s April 30-May 1 meeting showed the board divided on the future inflation path with some members warning that inflation could overshoot the BOJ’s projections.
The BOJ ended a massive stimulus programme last year and in January raised short-term rates to 0.5% on the view Japan was on the cusp of durably meeting its 2% inflation target.
While the central bank has signalled readiness to raise rates further, the repercussions from higher U.S. tariffs forced it to cut its growth forecasts and complicated decisions around the timing of the next rate increase.
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