Tokyo prices slow after hitting 42-year highs, but inflationary pressure persists

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Tokyo prices slow after hitting 42-year highs, but inflationary pressure persists

Core consumer price inflation in Tokyo, Japan’s capital, slowed in February on the effect of government energy subsidies, although an index stripping out the fuel effect hit a new three-decade high in a sign of rising inflationary pressure.

Other data showed Japan’s unemployment rate hit its lowest level in three years in January (2.4%), suggesting that intensifying labor shortages will push businesses higher wages and help cushion the impact felt by rising living costs on households.

According to analysts, these data cast doubt on the Bank of Japan’s view that recent cost-driven inflation will be temporary and will likely keep the central bank under pressure to gradually reduce its massive monetary stimulus.

“Inflation in the capital has fallen less than we expected last month, suggesting some upside risks to our forecast of inflation falling below the Bank of Japan’s 2% target by mid-year,” said Darren Tay, Japan economist at Capital Economics.

Tokyo’s core consumer prices, a leading indicator of nationwide trends, rose 3.3 percent in February from a year earlier, matching market forecasts and slowing from a near 42-year high of 4.3 percent reached in January, government data showed on Friday.

Tokyo’s core consumer price index (CPI), which excludes fresh food but includes the cost of fuel, exceeded the Bank of Japan’s 2% target for nine consecutive months.

The slowdown was mainly due to the effect of state energy subsidies to curb rising utility bills, the data showed.

A separate index for Tokyo, which excludes fresh food and energy prices, and is closely watched by the Bank of Japan as an indicator of price pressures driven by domestic demand, was 3.2% higher in February than a year earlier, beating January’s 3.0% rise.

That’s the fastest year-on-year increase since August 1991, when the index also rose 3.2 percent.

The cost of energy rose 5.3% in February from a year earlier, down from 26.0% in January. But fresh food prices rose 7.8% in February, faster than January’s 7.4%.

Services inflation, which the Bank of Japan sees as key to sustained wage growth, rose to 1.3 percent in February from 1.2 percent in January.

BOJ leaders have repeatedly stressed the need to maintain ultra-accommodative monetary policy until inflation sustainably reaches its 2% target, accompanied by higher wage growth.

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