Economy in Brief

Japan’s inflation measures excluding fresh food are showing significant pressure as the ‘all items ex fresh food’ metric soared at a 5.6% annual rate over 3 months while the measure excluding fresh food & energy rose at 3.7% pace over 3 months. The two gauges also rose by 3.7% and 3.3%, respectively, over a span of 12 months. The performance of the measure excluding fresh food & energy sequentially is plotted in the chart. It shows clear ongoing inflation pressure and acceleration.

This, of course, puts the Bank of Japan in a difficult position. Midyear elections are in prospect and sharp rise in rates could prove politically intrusive. At the same time, Japan’s largest trading partner, China, is struggling and its second largest trading parting, the United States, is embroiled in negotiations with Japan over tariffs. There is a great deal of uncertainty for Japan right now surrounding the policy process and that includes a large dose of geopolitical issues.

At the same time, there has been a kerfuffle in Japan’s bond market in the super-long end as purchaser demand has proved less solid and less stable than it was. The BOJ has had a scheduled taper of its purchases in place, one that the BOJ at its last meeting agreed to reduce in order to retain better demand in the long end of the JGB market. However, Japan does face some uncertain times for policy.

The inflation metrics with fresh food show the strongest growth rates for inflation. A traditional core measure that subtracts all food and energy shows less pressure at only 1.5% over 12 months, compared to core readings of 3.3% and 3.7% for the core measures that subtract out fresh food.

Looking across components, among the eight major categories only two have inflation easing over 12 months compared to 12-months ago; those two are ‘education’ where inflation is - and prices- are falling sharply, and ‘reading and recreation’ where inflation is at 2.9% but lower than it was 12-months ago. Over 6 months, only two of five categories show inflation acceleration (compared to the 12-month pace) and the 3-month annualized inflation across categories shows acceleration in half and deceleration in half compared to the paces over 6 months. Only education shows sequential deceleration – where the fall off is sharp. Only housing shows sequential acceleration, and the ramp up there is more moderate.

QTD (quarter-to-date) Quarter-to-data inflation (May & April over the Q1 average then compounded) shows a headline pace at 2%; ‘all items ex fresh food’ inflation is at a 4.7% pace; ‘all items ex fresh food & energy’ is at 3.3%, while the traditional core ‘excluding all food & energy’ is at 1.4%. So, again, we see on the QTD horizon the measures with fresh food subtracted – the BOJ’s preferred gauges- are showing the most pressure. By component, QTD pressure is lodged in ‘reading & recreation’ and in ‘transportation & communication;’ and ‘housing’ (without subtractions) flies below the 2% target at 1.8%.

Inflation in the United Kingdom measured by the CPI-H measure rose by 0.1% in May as the core excluding energy, food, alcohol, and tobacco also decelerated by increasing 0.1% on the month. These slower May increases follow accelerated increases in April for both the headline and core and more modest increases in March. The sequential growth rates in the headline CPI-H show a gain of 4% over 12 months, a rise at a 4.3% annual rate over 6 months, and a 3.4% annual rate rise over 3 months. The core for the CPI-H shows a 4.2% increase over 12 months, a 4.1% annual rate increase over 6 months and another slight deceleration to 3.6% at an annual rate over 3 months. These data for the headline and the core both show that U.K. inflation has plateaued and begun to edge lower; however, the deceleration is quite slight for both the headline and for the core measures.

Inflation diffusion that measures the breadth of inflation shows a reading of 54.5% over both 12 months and 6 months, with 3-month diffusion much lower at 36.4%. Diffusion readings of 50% show inflation accelerating and decelerating with equal tendencies from period-to-period. Diffusion above 50% shows more accelerating inflation while diffusion below 50% finds more deceleration for inflation. Diffusion readings show that for 3-months compared to 6-months diffusion is significantly lower but that diffusion over 6 months (compared to 12-months) and for 12-months (compared to 12-months ago) is slightly accelerating.

The HICP measure parallels the results for the headline CPI-H with a slight inflation bulge over 6 months and significant slowing of inflation over 3 months. The agreement across the headline, and core CPI-H measures compared to the HICP is reassuring that these trends are true and not simply mercurial or the results of a particular inflation weighting scheme (since CPI-H and HICP use different weights).

Meanwhile unemployment in the U.K. has risen only slightly over the past 12 to 24 months. The recent U.K. monthly GDP reading showed a sharp slowing, but year-over-year growth is still positive headline.

The sequential chart that depicts the growth rates sequentially for timeseries of 3-month, 6-month and 12-month inflation (above) shows that part from a one month slice of those rates (which is what the table provides) the timeseries reveal that the tendency for inflation peaked across these three frequencies back in January and has since been reduced to its lowest pace since October 2024 for both 6-month and 12-month CPI-H core inflation. For the 3-month version, inflation at 3.6% is the slowest since January 2024. Three-month core inflation has slowed without increasing for four months in a row as has 12-month core inflation.