Tokyo October Core Inflation Eases to 2.6% as Underlying Price Pressures Stay Elevated, Supporting Further Rate Hikes

Tokyo's core consumer price index, which strips out fresh food, rose 2.6% year on year in October, a slight slowdown from the 2.7% gain recorded in September, according to the latest data.

The headline inflation rate stood at 2.8%, while the price index excluding both fresh food and energy prices also climbed 2.6%.

The Bank of Japan is scheduled to announce its rate decision during the day, with the market widely expecting policymakers to keep their current settings unchanged.

A report released by the Bank of Japan on October 27 showed that consumer prices excluding fresh food and special factors rose 3.2% year on year in September, accelerating from 2.6% a month earlier and surging to a three-year high.

That gauge sits well above the central bank's 2% target, lending support to the authorities' case for continued rate hikes. Ahead of the latest data release, the Bank of Japan had already raised its policy rate to 1.25% in September, marking its fastest pace of tightening since 1990.

Government subsidies introduced in October to lower summer electricity and city gas bills helped curb upward pressure on prices, but that effect is likely to fade over the coming months. At the same time, energy prices continued to contribute to overall inflation, with electricity and natural gas prices rising 1.7% and 4.9% respectively, both reversing declines seen a month earlier.

Partly affected by conflict in the Middle East, Japan's services producer prices also accelerated. Market analysis suggests that based on the available data, Tokyo's core CPI remains at an elevated 2.6%, and the Bank of Japan's internal underlying inflation indicator has climbed to 3.2%, indicating that price pressures are structural in nature.

Although government subsidies have temporarily suppressed headline inflation readings, the shift in energy prices from declines to gains, combined with the gradual fading of the subsidy effect, means there is limited room for inflation to fall back in the future. The central bank is expected to stay on hold in the near term, but the persistently above-target underlying inflation gauge reinforces the policy logic for further increases to the benchmark rate over the medium term.