Tokyo inflation surprised on the downside

Chris Scicluna
Emily Nicol

Tokyo inflation surprised on the downside as energy provided a larger negative contribution, but underlying price pressures continue to grow gradually
Today’s Tokyo CPI figures surprised on the downside, with the headline inflation rate easing 0.3ppt in May to an eight-month low of 3.2%Y/Y. The BoJ’s forecast measure of core inflation (excluding fresh foods) also moderated 0.3ppt to 3.2%Y/Y. The downwards impulse was principally driven by energy inflation, which fell a further 5½ppts to -8.2%Y/Y, with the government’s support for household energy bills resulting in a double-digit decline in electricity inflation and the lowest gas inflation in 20 months. Food inflation also moderated very slightly (down 0.1ppt to 8.2%Y/Y) for the first time in eight months, with the softest increase in fish prices in 19 months offsetting slightly higher prices of fruit and margarine.

When excluding fresh foods and energy, the BoJ’s preferred measure of core inflation rose further in May, by 0.1ppt to 3.9%Y/Y, this highest since April 1982. And when stripping out all food and energy, the internationally comparable core CPI rate rose 0.1ppt to 2.4%Y/Y, the highest since September 1992, suggesting that underlying price pressures maintained a modest upwards trend. For example, the rise in hotel charges (11.5%Y/Y) was the highest since end-2021, education costs (2.0%Y/Y) the firmest for more than two years, recreational goods inflation (8.5%Y/Y) the strongest since 1982 and clothing and footwear inflation (5.0%Y/Y), the second-highest since 1992. And while still soft compared with developments in other major economies, autos inflation (1.7%Y/Y) was the highest since September 2020. Admittedly, housing rents (-0.1%Y/Y) were slightly negative for the first time in five years in May, while the contribution from other durable household goods such as washing machines and air conditioners eased.

The broadening of price pressures tallies with the BoJ’s estimates of underlying inflation at the nationwide level published earlier in the week. In particular, these showed a record-high 84% of items in the CPI basket with rising prices in April. The 15% trimmed mean CPI rate also increased for a second successive month by 0.1ppt to 3.0%Y/Y, just off the record high seen in January, while the modal rate rose to 2.8%Y/Y, a fresh series high and more than 1ppt higher than at the start of the year.

Looking ahead, national rates of headline and core inflation (excluding fresh foods) will ease in May and maintain a gradual downtrend to edge back below the BoJ’s 2% target at the end of the year. But given base effects from current policy measures, our colleagues in Tokyo expect it to shift slightly higher again thereafter. Overall, they expect inflation to average more than 2½% in FY23 compared with the BoJ’s April forecast of 1.8%Y/Y, with core inflation (excluding fresh foods and energy) averaging more than 3%Y/Y, compared with the BoJ’s projection of 2.5%Y/Y.

UK retail sales return to growth in April with firmest momentum in sixteen months
UK retail sales volumes rose 0.5%M/M in April, a touch above the median forecast on the Bloomberg survey of 0.3%M/M. But as the drop in March, when sales were hit by extremely wet weather, was revised up to 1.2%M/M, the level of sales in April was broadly in line with expectations. That meant that sales in April were still 0.9% below the pre-pandemic level in February 2020, and marginally below the Q1 average level. Nevertheless, they were also up 0.8%3M/3M, the strongest rate on that basis since August 2021 and suggestive of much improved spending momentum. Excluding auto fuel, sales were even firmer, up 0.8%M/M and 1.0%3M/3M. And given the further significant rise in prices, as reported in Wednesday’s shocking inflation data, the nominal value of sales was up 1.7%M/M and 2.4%3M/3M.

Within the detail, sales volumes at food stores were up 0.7%M/M but just 0.1%3M/3M as record inflation of staples continued to weigh. Sales at non-food stores rose 1.0%M/M to be up a firm 1.6%3M/3M. Sales of clothing were up 0.2%M/M but were little changed on a three-month basis. In contrast, department store sales rose 1.7%M/M to be up more than 3%3M/3M, but were still down more than 5% from the pre-pandemic level.

Overall, the sales data will have reaffirmed the view at the BoE that, with household energy bills set to fall in July and again in October, consumers are now happier and more willing to spend. And given the unwelcome persistence and increasingly broad-based nature of underlying inflation, the demand environment is certainly not going to be an obstacle to further monetary tightening into the second half of the year.

French consumer confidence moved sideways in May but remain well below long-run average
According to INSEE, French consumer confidence remained broadly stable in May, with the headline sentiment index unchanged at 83. Nevertheless, this was a touch weaker than the Bloomberg survey forecast, still well below the long-run average (100) and contrasted with the overall improvement in the Commission’s aggregate euro area estimate. Thanks to a marked improvement in expectations for inflation over the coming year, households were the least pessimistic about their future financial situation since the start of 2022, albeit the index still remains at a depressed level. This notwithstanding, the share of households considering it a good time to make major purchases fell further in May, to its lowest on the series in the absence of the sudden slump at the onset of Covid three years ago. The latest Italian consumer and business surveys for May are also due shortly.

US personal spending and PCE deflators figures a key focus today
In the US, today brings a number of top-tier macroeconomic data releases with personal income, consumption and prices data for April due along with goods trade and durable goods orders figures for the same month. Daiwa America’s economists forecast a firm rise in personal income of 0.5%M/M and a rise in personal spending that’s a little stronger than that thanks not least to a jump in sales of autos. And so, as they expect the core PCE deflator to rise 0.3%M/M (a touch below the rise in the core CPI that month), incomes and spending would be up in real terms. The durable goods orders data, however, are expected to be weak, with the headline figure weighed by a drop in new aircraft orders and booking excluding transportation items down too. And the goods trade deficit is expected to widen in April after narrowing the prior month. Meanwhile, the final University of Michigan consumer survey for May is expected to confirm a marked decline in the headline sentiment index to a six-month low, while the gauges of inflation expectations are likely to have edged slightly higher this month. 

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