Research Briefing | Sep 14, 2023

Food-driven inflation is unlikely to stay in Japan

While the headline CPI has eased from its peak in January with energy subsidies, core CPI (excluding energy) has been on the uptick. This is primarily due to strong price increases in food. As food tends to be purchased often and account for a large part in the consumption basket – 22% in CPI, excluding restaurants – price increases in food give considerable impact on households’ purchasing power.

Conversely, inflation started to slow in goods other than foods and energy, following a settling in import prices. Meanwhile, service prices are edging up, but at a moderate pace of around 2%.

What you will learn:

  • CPI inflation has remained elevated longer than we thought, mainly reflecting the pass-through of import food price rises. We believe this is transitory, as firms cannot afford to raise prices given stagnant household income.
  • Although it was beyond our projection, the ongoing strong and persistent pass-through in food follows a historical pattern. Food inflation is sticky because it has long lags in the transmission of input prices to the final retail prices. Once a large cost increase kicks in, however, pass-throughs tend to accelerate rapidly and widely in the sector.
  • We think that food price will soon peak. Imported food prices peaked in Q3 last year, and items with higher price rises are experiencing more declines in sales volume amid stagnant income.
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