Japanese Inflation Held Back, Gasoline Subsidies Are the Deciders

JAKARTA - Japan's core inflation in May rose 1.4 percent year-on-year. The increase is still restrained because gasoline subsidies also put pressure on energy prices.

According to a Kyodo News report quoted on Friday, June 19, Japanese Ministry of Internal Affairs and Communications data showed that the core consumer price index or core CPI rose 1.4 percent in May. This figure was the same as April and was still below 2 percent for four consecutive months.

CPI is an index that measures changes in the prices of goods and services paid by consumers. In this data, the core CPI does not include fresh food prices because their prices are easily changed.

For the Bank of Japan, this figure is important. The Japanese central bank has just raised its benchmark interest rate to 1.0 percent, the highest level in 31 years. Inflation data is one of the materials to assess whether interest rates should be raised again.

The core consumer price index, which strips out energy and fresh food to see underlying price trends, rose 1.8 percent in May.

Energy pressures eased. Energy costs fell 2.5 percent on an annualized basis, after falling 3.9 percent in April. Gasoline prices fell 7.0 percent thanks to government subsidies. The decline was also helped by the end of a temporary tax on fuel in December. Electricity bills also fell 2.4 percent.

The Japanese government has been subsidizing large oil traders since mid-March. The goal is to keep the average retail price of gasoline at around 170 yen, or about 1 US dollar per liter.

The policy was taken when the Middle East conflict pushed crude oil prices up. Without subsidies, energy prices could put more pressure on households and businesses.

Food prices excluding fresh goods rose 3.5 percent in May. The increase slowed from 4.1 percent in April. Food inflation has also slowed for 10 consecutive months.

Rice prices fell 4.9 percent and entered the negative zone for the first time since November 2022. The ministry said rice prices were still high, but the increased stock helped hold off the increase.

However, not all prices fell. Exterior paint costs rose 4.7 percent due to rising raw material prices.

Kyodo News quoted a ministry official as saying it was difficult to determine whether the price movement was directly influenced by the Middle East situation.

This Japanese data shows one simple thing. Gasoline subsidies can hold inflation in the short term. However, for the central bank, inflation figures must still be read carefully before deciding on the direction of interest rates.