UBS Economics-Japan Economic Comment _Japan Inflation Tracker energy push...-108464766.pdf

ab31May2024GlobalResearchandEvidenceLabJapanEconomicCommentJapanInflationTracker:energypushedcore-CPIhigherMayTokyoCPI:electricitypricepushedcore-CPIhigherInTokyo"sCPIreportforMay,coreCPI(ex.freshfoods)inflationrose1.9%y/y,upfrom1.6%lastmonth.Itwas0.1%ptlowerthanourexpectation.Month-on-monthgainwasstrongat+0.4%after-0.4%lastmonth,whenhighschoolfeesexperiencedasharpfall.Thisstronggainwasmostlyexplainedbysurgingelectricityprice(13.1%y/yfrom-2.1%)causedbyincreaseofrenewableelectricitysurcharge.Asexpected,core-coreCPIexcludingenergyconfirmedfurtherdisinflation,downfrom1.8%inAprilto1.7%,mainlyduetoslowedhotelcharges(+14.7%from18.8%).Inmonth-on-monthgrowth,core-coreCPIrose+0.1%.Giventhetoday"soutcome,weenvisagenationwidecore-CPIandcore-coreCPIat2.5%/y(from2.2%inApril)and2.3%(from2.4%)respectively.ServiceinflationwasnotimpressivethismonthalsoAmongthecore-corecomponent,inflationincore-goods(ex.energyandfoods)andservicesslowed0.4%ptto3.2%y/yand0.1%ptto0.7%respectively(notethatthelatterserviceinflationwas1.4%afterexcludingthehighschoolfees).Meanwhile,foods(ex.fresh)whichhadbeenthemaindriverofdisinflationremainedunchangedat3.2%y/yfromlastmonth.Forthecore-goods,widerangeofgoodsexperiencedafall(26%upfrom22%threemonthsago)whiletherewasanaccelerationofhouseholddurables(+4.1%from-3.8%).Developmentinserviceinflationwasnotimpressivethismonthexceptforhousingrent,whichmarkedthehighestincreasesince2019(+0.6%).UBScore-servicemeasurewhichaimedtocaptureunderlyinginflationbyexcludingnoisyspecialcomponentsonlyrose0.5%y/y,downfrom0.9%inMarchand0.5%inApril(Figure8).Indeed,theshareofincreaseditemsinserviceinMaywas64.0%,downfrom71.2%threemonthsago(68.8%from76.4%foroverallitems).Separately,inflationinlow-volatilityitemsforTokyoalsodidn’tshowcleardevelopment,hoveringaround1.1-1.2%forthepast12monthsaccordingtoUBSestimate(Figure15).Inflationrelateddata:optimisticfirmsoutputpricesettingandweakconsumersentimentThelackofupwarddevelopmentinservicesandunderlyinginflationinrecentmonthshasbeensomewhatdisappointing.However,weareconfirmingthatfirmspricesettingstance,whichispartlyeffectiveleadingindicatorofinflationshowssomepickup,possiblyfurtherdisinflationcouldbelimitedespeciallyservices(Figure22).WemayneedtowaitpatientlyandseebothwagedevelopmentandserviceinflationthroughSummer.Meanwhile,weakconsumersentimentisanothernewconcern,trendingdownwardlyforthepasttwomonths(Figure32).Risingenergypricewouldbepartofthereason,andfurtherweakconsumptionactivityisdownsideriskinourinflationview,particularlyintheperspectiveofdemand.Energylikelytoliftcore-CPIhigherWhileit"shardtosaytherewassignificantdevelopmentinunderlyinginflationtrendfromTokyoCPI,energypricelikelytoacceleratecore-CPIfurtherinJuneandJulyduetoagradualendofsubsidyonelectricityandgasprice(Figure36-39).Thesubsidy,whichcurrentlyweighon0.5%ptinCPI,isexpectedtobehalvedinJuneandendinJuly(henceanother0.25%ptofupsideinJuneandJuly).Thisleavesourprojectionofnationwidecore-CPIat2.7%and2.8%inJuneandJuly,significantlyupfromestimated2.5%inMayandactual2