Japan's Inflation Shows Mixed Gains

Japan's inflation rose by 0.4% in July after slowing to a 0.1% gain in June. The category, all prices excluding fresh food saw prices grow by 0.5% compared to a 0.2% June gain. All items less food & energy rose by 0.2% after gaining 0.1% in June. Western economies would kill for these trends…

Across the eight major components listed in Japan's CPI, four of them show extremely weak (or no) gains month-to-month in July. Education, medical care, and miscellaneous goods show prices rising by 0.1% while housing showed no gain at all month-to-month. Food & beverage prices rose by 0.5% month-to-month. Clothing & personal items prices rose by 0.5% and transportation & communication prices rose by 0.4%, while reading & recreation prices surged by 0.7% but that followed a 0.6% June drop.

For the headline and for most components, in fact - for nearly all components, Japan shows no tendency- no clear trend - for inflation to either accelerate or decelerate. The one significant departure from this is for all items excluding food & energy where prices rise 0.3% over 12 months, at a 2.2% annual rate over six months and at a 2.4% annual rate over three months completing a clear sequential cycle of trend acceleration for the core CPI.

However, the headline and the headline excluding fresh food do not show any such pattern nor do any of the 8 major components of Japan's CPI. None of the 8 main components show either inflation clearly accelerating or decelerating. All of the components have a mixed pattern. Only when in the core, with food & energy stripped out, does this trend emerge. Over 12 months compared to the year ago, headline and core inflation both accelerate as does the total CPI excluding fresh food. And among the eight major categories inflation accelerates for food & beverages, medical care, and for transportation & communication. This is despite the fact that the inflation rates actually are negative for medical care and for transportation & communication but those prices fall at a slower pace over 12 months than they did one year ago, hence ‘acceleration.'

Six-month trends show acceleration for the headline to the core CPI and for the total CPI excluding fresh food. Food & beverage prices accelerate, housing costs accelerate, miscellaneous prices accelerate, reading & recreation prices accelerate, and transportation & communication prices also accelerate over six months compared to 12 months. Among the eight components of the CPI, five of them accelerate and three of them decelerate.

Three-month trends show a weakening of inflation compared to six-months for the headline CPI and for the headline excluding fresh foods. The core rate continues to accelerate. Among the eight detailed categories, prices accelerate in half and they decelerate in the other half. Prices accelerate for clothing & personal items, for education, for medical care, and for reading & recreation.

If we calculate acceleration in a truncated fashion, by skipping the six-month to one-year change and just comparing the three-month annualized change to the 12-month change, then Japan's inflation rate accelerates in the headline categories as well as in all 8 detailed product categories. I supposed we can conclude that inflation is lurking in Japan and rising with some degree of subtlety.

We see the strength in prices in the quarter-to-date developments. The current data are for July, so that's the first month of the third quarter. These calculations compute the annualized inflation rate by taking the July gain over the previous quarter's average and compounding that gain from the center of the quarter. On that basis, headline inflation runs at 3.2% early in Q3. The CPI excluding fresh foods runs at a 4.2% pace. The core rate rises at a 2.2% rate which is actually a pace slightly below its three-month pace. The quarter-to-date calculation across the eight detailed components of the CPI show price gains that generally are slightly weaker than the gains calculated over three months.

Summing up The U.S. the U.K. and EMU have an inflation problem. Japan has some scattered inflation issues. They are not the same thing. It is not clear that Japan's price stability mindset has been changed enough to encourage more moderate (healthy) inflation in the future. For now, Japan's inflation is more an annoyance than a problem, but its presence does not mean that the Bank of Japan has reached its inflation target for good. The jury is still out on that one; we will see what remains of inflation when the dust and smoke from Russia's war, Covid, and the supply shocks clear.