By Leika Kihara
TOKYO (Reuters) -Core inflation in Japan’s capital hit 3.6% in the year to May, data showed on Friday, marking a more than two-year high in a sign persistent rises in food costs will keep the central bank under pressure to hike interest rates further.
Factory activity is stalling with separate data showing industrial output fell in April, highlighting the dilemma the Bank of Japan faces in balancing mounting inflationary pressures and the hit to the economy from steep U.S. tariffs.
The increase in the Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, exceeded a median market forecast for a 3.5% gain and followed a 3.4% rise in April. It was the fastest annual pace of increase since January 2023, when it hit 4.3%.
Core inflation in Tokyo, seen as a leading indicator of nationwide price trends, thus exceeded the BOJ’s 2% target for three straight years.
A separate index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 3.3% in May from a year earlier after a 3.1% rise in March.
Part of the rise was due to the base effect of last year’s sharp drop caused by the launch of school education subsidies and the phase-out of nationwide subsidies to curb utility bills.
But the data showed signs of sticky food inflation with non-fresh food prices up 6.9% in May from a year earlier. The price of rice soared 93.2% year-on-year.
Services inflation accelerated to 2.2% in May from 2.0% in April, suggesting companies were gradually passing on rising labour costs.
Separate data released on Friday showed Japan’s factory output fell in April by 0.9% from the previous month. Manufacturers surveyed by the government expect output to increase 9.0% in May and drop 3.4% in June, the data showed.
While uncertainty over U.S. tariffs will likely keep the BOJ on a holding pattern, the price pressure may not allow the bank to pause on rate hikes for too long, some analysts say.
BOJ Governor Kazuo Ueda said on Tuesday the central bank must be vigilant to the risk rising food prices could push up underlying inflation that is already near its 2% target.
The BOJ ended a decade-long, massive stimulus programme last year and in January raised short-term interest rates to 0.5% on the view Japan was on the cusp of durably meeting its 2% inflation target.
While the central bank has signalled readiness to raise rates further, the economic repercussions from higher U.S. tariffs forced it to cut its growth forecasts and complicated decisions around the timing of the next rate increase.
A Reuters poll, taken on May 7-13, showed most economists expect the BOJ to hold rates steady through September with a small majority forecasting a hike by year-end.
(Reporting by Leika Kihara; additional reporting by Satoshi Sugiyama; Editing by Sam Holmes)
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