By Leika Kihara
TOKYO (Reuters) – Japan’s core inflation hit 3.7% in May, the fastest annual pace in more than two years and keeping pressure on the central bank to resume interest rate hikes.
The data underscores the challenge the Bank of Japan faces in juggling mounting pressure from sticky food inflation and risks to the fragile economy from U.S. tariffs.
The increase in the core consumer price index (CPI), which excludes volatile fresh food costs, compared with a median market forecast for a 3.6% gain and followed a 3.5% rise in April. It was the fastest annual pace since 4.2% marked in January 2023, government data showed on Friday.
A separate index that strips away the effects of both volatile fresh food and fuel costs, which is closely watched by the BOJ as a better indicator of demand-driven price moves, rose 3.3% in May from a year earlier after a 3.0% rise in April. It was the fastest year-on-year rise since January 2024, when the index was up 3.5%.
Stubbornly high prices of food, particularly those of Japan’s staple rice, remained the main driver of inflation, the data showed.
Food prices, excluding those of volatile fresh food, rose 7.7% in May from a year earlier, faster than the 7.0% gain in April, reflecting the pain households are feeling from rising living costs. The price of rice doubled in May from year-before levels, the data showed.
Service-sector inflation hit 1.4% in May, slightly faster than the 1.3% in April but much slower than the 5.3% increase for goods prices, the data showed.
The BOJ ended a massive stimulus programme last year and in January raised short-term 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 slight majority of economists in a Reuters poll expected the BOJ’s next 25-basis-point increase to come in early 2026.
(Reporting by Leika Kihara; Editing by Sam Holmes)
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