Japan’s key consumer inflation measure accelerated more than expected to a fresh two-year high as Prime Minister Shigeru Ishiba gears up for a summer election and the Bank of Japan mulls the country’s price trajectory.

Consumer prices excluding fresh food quickened for a third month to 3.7% from a year earlier in May, according to an internal affairs ministry release Friday. That’s the fastest pace since January 2023 and above a 3.6% median estimate of surveyed economists.

Food inflation was again a major driver, with the price of rice — the nation’s staple food and a politically sensitive product — jumping 102% from a year earlier. Service prices, a metric closely watched by the BOJ, rose 1.4% from a year earlier, slightly more than 1.3% in April.

The report comes as Ishiba’s minority government and opposition parties debate how to reduce the pain of rising living costs, which contributed last fall to the ruling party’s biggest election setback since 2009.

"Japan’s inflation is strong, driven by food costs — rice prices are surging, and it’s impacting other related items,” said Taro Saito, head of economic research at NLI Research Institute. "Today’s data will leave little doubt that inflation will be the key agenda for next month’s election.”

With an Upper House election expected to be held on July 20, Ishiba has pledged cash handouts to households, while opposition parties are calling for a first-ever cut to Japan’s sales tax. To quell public discontent over soaring rice prices, the government has taken a host of measures to bring down the cost of the grain, helping prop up its popularity from a record low in a local media poll.

Elevated price growth has also supported the BOJ’s posture for a rate hike as it awaits clarity on U.S. tariff measures and their economic impact. Japan’s inflation has been running at the fastest pace among Group of Seven nations of late and has stayed at or above the BOJ’s 2% target for more than three years.

Speaking hours after the CPI release at a financial conference in Tokyo, BOJ Gov. Kazuo Ueda hinted there was little shift in the central bank’s price outlook, sticking with his view that the effects of rice prices are poised to wane while underlying inflation will rise gradually toward policymakers’ target.

A recent surge in oil prices as tensions in the Middle East deepen could provide an additional source of inflationary pressure. Oil has historically been a key factor influencing Japan’s prices, and businesses now have become more willing to pass their costs along to consumers.

Still, the central bank has kept borrowing costs at 0.5%, the lowest among major peers, in a cautious approach to shifting the economy away from deflation. It’s also argued that the underlying price trend still remains below 2%.

Major food companies will increase prices on about three times as many products in June as they did a year ago, according to Teikoku Databank. Lotte, a large producer of confectioneries and ice cream, and Meiji, which makes dairy products, both announced price hikes this month, citing rising costs.

BOJ Gov. Kazuo Ueda said he will carefully monitor the impact of oil and rising food prices on inflation expectations after his board kept the policy rate unchanged earlier this week. Ueda signaled little need to rush on a rate hike, stressing his stance of monitoring hard data for the impact of U.S. tariff measures.

The central bank has said it expects upward pressures from an increase in imported goods and rice prices to dissipate going forward. Policymakers are waiting for underlying inflation measures, such as price expectations, to rise toward their sustainable 2% target.

"Today’s data won’t have much impact on BOJ’s policy stance as it’s focused on discerning the effect of U.S. trade measures,” said NLI’s Saito. "Due to technical factors and government measures, I expect core CPI to peak out from here on. It will probably be below 3% rather rapidly by around July or August.”