Core inflation stayed flat at 0.8% in July, backed by higher lodging, energy costs

Inflation stayed steady in July amid rising energy costs but remained far below the Bank of Japan’s elusive target rate of 2 percent, government data showed Friday.

Japan’s core consumer price index, which excludes the volatile prices of fresh food but not energy, rose 0.8 percent from a year earlier, maintaining the same pace as in June.

Including fresh food, a surge in vegetable and seafood prices lifted consumer prices 0.9 percent, compared with 0.7 percent in June.

If the prices of both fresh food and energy are excluded, however, consumer prices rose only 0.3 percent from a year prior, accelerating slightly from 0.2 percent the previous month. This oft-used standard is known as the core-core reading.

Core prices rose for the 19th consecutive month, with the index sitting at 100.9 against the 2015 base of 100, according to the data released by the Internal Affairs and Communications Ministry.

An increase in utility prices including electricity, gas, gasoline and kerosene continued to be the biggest driver of price gains as crude oil continued to climb.

Prices for hotel rooms and other lodgings also rose, the data showed.

The cost of housing and durable household items like vacuum cleaners meanwhile fell.

Amid a lack of structural economic reforms from the government, the stagnant price growth has been vexing the BOJ, which tweaked monetary policy last month after projecting it will take years to lift inflation toward 2 percent, the level it sees as consistent with a healthy economy.

Under the revamped measures, the central bank will allow long-term interest rates to rise slightly higher from its zero percent benchmark, while projecting inflation will continue to run below target at least through the fiscal 2020 ending in March 2021.

“Looking ahead, the CPI should continue to draw support from higher oil prices through the end of 2018, but that effect is likely to fade gradually into 2019,” said Kazuma Maeda, an economist at Barclays Securities Japan Ltd.

“Although output gap improvements and wage growth will serve to underpin prices, we believe core CPI inflation is likely to converge to around 1 percent year-on-year.”

Other experts expressed similar concerns that the effect of high energy prices will reach its limit.

Hiroaki Muto, chief economist at Tokai Tokyo Research Center, said, “The amount of upward pressure it contributes will shrink from here.” He sees inflation converging at about 1 percent at full employment levels.

Energy prices could still push inflation to 1 percent by early autumn, but it’ll likely drop into the range of 0.6 percent to 0.9 percent after that, said Mari Iwashita, chief market economist at Daiwa Securities Co.

Iwashita flags telecom prices as a big risk factor going ahead amid government attempts to lower mobile phone charges by as much as 40 percent.

“From a 2 percent inflation target perspective, I’m not joking when I say the BOJ should create a new core-core inflation index that excludes mobile phone bills.”

The latest data raise the hurdle for the BOJ to stick with its recently downgraded price forecasts, said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. “Looking ahead there’s a high possibility that the inflation forecasts will be downgraded again.”

Including fresh food, a surge in vegetable and seafood prices lifted consumer prices 0.9 percent, compared with the 0.7 percent increase in June.

A ministry official said at a briefing that prices continued to rise moderately, with no significant impact from the flooding and landslides caused by torrential rains last month that devastated western Japan.

Excluding both fresh food and energy, consumer prices rose 0.3 percent from a year prior, accelerating slightly from 0.2 percent the previous month.