Japanese inflation driven by energy and food prices

Chris Scicluna
Emily Nicol

Japanese inflation driven by energy and food prices, core inflation still close to zero
There were no surprises from the latest Japanese inflation numbers, with the headline CPI rate unchanged at 2.5%Y/Y, the firmest reading since October 2014, but nevertheless still small beer compared with the US (8.6%Y/Y), euro area (8.1%Y/Y) and UK (9.1%Y/Y). The BoJ’s forecast measure of core CPI, excluding fresh foods, also moved sideways at 2.1%Y/Y while its preferred measure of core CPI, which excludes fresh foods and energy, was unchanged at a significantly lower 0.8%Y/Y.

Like the other major economies, much of Japan’s inflationary pressures continue to stem from food and energy, which have been exacerbated by the recent yen depreciation. Admittedly, the government’s fuel relief measures helped reduce gasoline prices for the second successive month in May (-2.0%M/M) to leave the respective annual rate down 2.6ppts to 13.1%Y/Y, while electricity price inflation eased 2.4ppts to 18.6%Y/Y. Nevertheless, despite falling to a four-month low, energy inflation was at a still-lofty 17.1%Y/Y, to account for almost half of all inflation. And with food inflation rising 0.1ppt to 4.1%Y/Y, the highest since March 2015, it too added a further 1.1ppt to headline inflation.

So, while there was some further evidence of supply-side pressure on prices of household durable goods (such as air conditioners), up 2.4ppts to a three-year high of 7.4%Y/Y, our estimate of non-energy industrial goods inflation remained close to zero. In addition, services inflation was unchanged and still in negative territory at -0.3%Y/Y. So, when excluding all food and energy, the internationally comparable measure of core CPI remained close to zero too, rising just 0.1ppt to 0.2%Y/Y, a far cry from equivalent rates in the US (6.0%Y/Y), euro area (3.8%Y/Y) and UK (5.9%Y/Y) and arguably providing further justification for the BoJ’s ultra-accommodative policy stance.

UK retail sales maintain downtrend in May as consumer confidence hits new low
Broadly as expected, UK total retail sales fell 0.5%M/M in May. But with growth in April (which had previously looked suspiciously firm) revised down 1ppt to just 0.4%M/M, the level of sales in May was also a 14-month low, down a hefty 4.7%Y/Y and more than 6% below the post-Covid peak, albeit still 2.6% above the pre-pandemic level in February 2020. The drop in May also left the average level of sales in the first two months of Q2 0.8% below the average in Q1. And with yesterday’s CBI distributional trades survey pointing to ongoing sales weakness in June, retail sales look odds on to post a chunky drop in Q2, reaffirming expectations for a fall in GDP this quarter too.

The drop in sales volumes in May was principally due to the food component, which fell 1.6%M/M, seemingly a response to sharply higher prices. In contrast, auto fuel sales rose 1.1%M/M. Non-food stores were unchanged from April as higher sales of clothes (2.2%M/M) was offset by a drop of 2.3%M/M in sales of furniture (another category currently experiencing record inflation) and a decline in sales in department stores of 1.1%M/M. With inflation high, the value of retail sales rose 0.6%M/M in May following an increase of 1.0%M/M the prior month to be some 13.0% above the pre-pandemic level.

The ongoing downtrend in sales volumes is hardly a surprise in light of declining real disposable incomes and weak household sentiment. Indeed, earlier today the GfK survey reported a further drop in its headline consumer confidence indicator in June, down 1pt to -41, a new low on the series dating back almost 50- years. The climate for making major purchases was still judged to be the worst since the first wave of Covid-19, while consumers’ assessment of the outlook for their own personal finances also dropped to a new series low. Against that gloomy backdrop, yesterday’s defeats for the ruling Conservative Party in two very contrasting by-elections – one to Labour, the other to the Lib Dems – was also not unexpected, but adds to uncertainty about the future of PM Boris Johnson just weeks after he unconvincingly survived his Party’s no-confidence vote. Expect political noise and bad policymaking to continue to weigh on sterling.

German ifo likely to mimic yesterday’s downbeat flash PMIs; Italian business and consumer confidence to remain subdued too
Following yesterday’s downbeat flash PMIs, focus today turns to the German ifo survey. While the median forecast on the Bloomberg survey is for the ifo current assessment balance to move broadly sideways and the expectations balance forecast to edge higher, we suspect that these indices will fall back at the end of Q2 reflecting a marked weakening in conditions across the manufacturing and services sectors alike. Meanwhile, the Italian ISTAT business and consumer sentiment surveys are expected to see little improvement in June. Revised Spanish GDP data for Q1 are also due shortly (growth was previously estimated at 0.3%Q/Q and 6.4%Y/Y).

US new home sales figures and revised consumer confidence survey due
In the US, today will bring the latest new home sales figures for May. Although the housing market is facing substantial headwinds in the form of elevated prices and interest rates and slumping consumer confidence (see below), the plunge of 16.6%M/M in sales of new homes in April may have overstated the degree of weakness. And so a small rebound is possible in May, although sales are likely to remain well below the average in the 12 months. The revised University of Michigan consumer sentiment survey is expected to confirm that the headline confidence index slumped in June, by 15pts to 50.2, a record low. 

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