Japan’s households cut back on spending in July while real wages fell again, amid a surge in COVID-19 cases and a steady increase in the cost of living, suggesting the country’s recovery path is still shaky.

Household outlays dropped 1.4% from June as spending on furniture, clothing and insurance fell, the internal affairs ministry reported Tuesday. Spending was 3.4% higher than a year ago, compared with a 4.6% gain forecast by analysts.

Another report showed wages adjusted for inflation continued to fall while nominal wage growth slowed, pointing to a further decline in households’ purchasing power.

The drop in real consumer spending, which accounts for the impact of inflation, adds to signs that the economic recovery from the pandemic remains fragile. The summer saw a record jump in COVID-19 cases, though the government has continued to hold back from reinstating virus-related restrictions.

"Rising prices without wage growth can be an obstacle to the private consumption recovery in the next six months," said Takumi Tsunoda, senior economist at Shinkin Central Bank Research Institute.

The month-on-month spending drop could be because consumers felt less confident visiting shops due to rising numbers of coronavirus cases, a government official told reporters.

"Pent-up demand has been peaking,” said Hiroaki Muto, economist at Sumitomo Life Insurance. "I think such a surge in infections ... caused some consumers to hold back activity on their own even though there’s been no mobility restrictions.”

Rising prices, especially for daily necessities like food and utilities, are hitting consumers — who hold the key for the continuation of the economic recovery. Prime Minister Fumio Kishida is set to compile a new round of measures to limit the impact of inflation later this month.

Inflation remains moderate in Japan, but the nation’s dependence on imported food and energy is making the impact tangible and acute for consumers and businesses. The yen’s slide to a 24-year low against the dollar is also amplifying the pain — a trend that’s increasing this month as the yen plumbs fresh lows.

If the yen remains at ¥140 per greenback for the next six months, Japanese households will be forced to spend 1.3% more than the previous year for food, energy and other essential costs, according to an estimate by Saisuke Sakai, senior economist at Mizuho Research and Technologies.

"Households are taking the hit of higher inflation with the yen's further decline, which inevitably drags down private consumption," he said, adding that the chance of Japan's core inflation hitting 3% in the final three months of this year is heightening.

The nation's economy has returned to its pre-pandemic size, but officials have stressed the need to keep policy support in place to help consumers and companies deal with rising prices. The Bank of Japan is also keeping interest rates at rock-bottom levels to support the economy, saying inflation remains unsustainable without more robust wage growth.

The latest wage data showed cash earnings rose at a slower pace of 1.8% from a year ago in July, according to the labor ministry. Real wages adjusted for inflation dropped 1.3%, falling for a fourth straight month, meaning workers’ purchasing power is continuing to weaken.

"Wages are picking up slowly, but a drop in real wages works against consumption,” said Muto at Sumitomo Life.