How much did new core inflation accelerate, and whose expectations did it exceed?

  • Japan’s new core CPI, excluding fresh food and energy, rose 2.4% year on year in September, accelerating by 0.5 percentage points from 1.9% in August. The result was slightly above the Bloomberg market consensus of 2.3% and in line with Goldman Sachs’ forecast; the gap to consensus was only 0.1 percentage points.
  • Month-on-month price momentum also strengthened: on a seasonally adjusted basis, the new core CPI increase widened from 0.3% in August to 0.5% in September. The acceleration in both annual and monthly rates shows that the rebound was also reflected in price changes during the month.

Service prices jump: why focus on the long holiday and airfares?

  • Accommodation and outbound package tour prices together contributed about 0.1 percentage points to the year-on-year increase in the new core CPI in September. Goldman Sachs believes that the first five-day “Silver Week” holiday in 11 years, which occurred in September, partly explains the rise in these two price categories; both are also relatively volatile items.
  • Goldman Sachs estimates that private-sector service prices excluding rent, a measure watched by the Bank of Japan, jumped at an annualized month-on-month rate from 0.5% in August to 10.7% in September; the year-on-year increase rose from 2.0% to 2.6%. Accommodation, outbound package tours and airfares were the main drivers, so the strength of these service data is closely linked to travel-related items.
  • Goldman Sachs believes higher airfares may reflect elevated aviation fuel prices. This means that even though the new core CPI directly excludes energy, fuel costs can still pass through via transport service prices.

Besides travel, what other forces are pushing prices higher?

  • Goldman Sachs links increases in some durable goods prices to a weaker yen, and observes that high naphtha and memory chip prices have driven price increases for some durable goods and household consumables. Goods-side cost pass-through is occurring alongside higher travel prices, while a separate temporary factor lies behind the rise in golf club prices.
  • Food prices diverged: items such as rice became cheaper, while dining out and prepared foods became more expensive. Overall, food excluding fresh items made a small positive contribution to the new core CPI.
  • The year-on-year increase in “global core CPI,” which further excludes food other than alcohol and energy, also rose from 1.6% in August to 2.2% in September. Accommodation, outbound package tours and airfares contributed 0.2 percentage points to its annual increase, showing that price rises outside food also warrant attention.

Why was the increase in headline CPI smaller?

  • Energy price inflation showed no significant change. Core CPI excluding fresh food rose from 1.7% to 2.1% year on year, in line with market consensus and below Goldman Sachs’ forecast of 2.2%. The new core measure’s slight upside surprise relative to the market did not mean that all inflation measures exceeded expectations.
  • Headline CPI inflation rose only from 1.9% to 2.1% year on year, an acceleration of 0.2 percentage points, because falling fresh food prices offset some upward pressure. Differences in the increases across measures mainly reflect the food and energy items each includes.
  • The effects of Tokyo’s local policies also need to be distinguished geographically: the end of some free childcare provision and summer basic water-charge relief contributed 0.6 percentage points to Tokyo’s new core CPI in September, but only 0.1 percentage points to the national measure.