Japanese headline inflation eased in May

Chris Scicluna
Emily Nicol

Japanese headline inflation eased in May on government’s energy support, but core inflation up to a new 41-year high
As expected, Japanese headline inflation moderated in May, down 0.3ppt to 3.2%Y/Y, 1.1ppt below January’s peak. The BoJ’s forecast measure of core inflation (excluding fresh foods) also fell 0.3ppt to 3.2%Y/Y, similarly a percentage point below the peak. But once again this principally reflected a lower energy component. Indeed, when excluding fresh food and energy, core inflation rose 0.2ppt to 4.3%Y/Y, the highest since June 1981. And when excluding all food and energy, the internationally comparable core rate rose 0.1ppt to 2.6%Y/Y, the highest since August 1992.

Within the detail, the downwards impulse stemmed from energy, down 3.8ppt to -8.2%Y/Y to knock 0.3ppt off headline inflation, reflecting the government’s support for household energy bills, which in May included for the first time a cut in the surcharge rate for renewable energies and liquified petroleum gas bills. In particular, electricity prices were down a much steeper 17.1%Y/Y in May, the largest annual drop since the series began in 1971. Meanwhile, the rise in gas prices (2%Y/Y) was the softest since September 2021. In contrast, there was a very modest upwards impulse from a smaller decline in petrol prices. When excluding fresh items, food inflation rose to a new series high (9.3%Y/Y), with beverage prices up by the most since 1978.

Looking at core items, despite some upwards pressure from laundry, hotel and taxi charges, services inflation moved sideways at 1.7%Y/Y, nevertheless still the joint-highest since the consumption tax hike-related jump in 2015. And perhaps reflecting the pass-through of higher import prices not least associated with the weaker yen, core goods inflation rose to a further 0.3ppt to 6.0%Y/Y, the highest for more than 42 years. While core goods inflation might well be close to the peak, our colleagues in Tokyo expect services inflation to edge higher over coming months. Overall, they forecast core inflation (excluding fresh foods to edge slightly lower in Q3 (2.8%Y/Y), before temporarily easing back below the 2%Y/Y at the turn of the year. But this would still leave inflation at 2.5%Y/Y in FY23 (well above the BoJ’s median expectation in April’s Outlook Report) and averaging 2%Y/Y in FY24 and FY25.

Japan’s flash composite PMIs fell in June, but remained consistent with solid GDP growth in Q2 supported by services
The flash Japanese PMI surveys suggested a further easing in price pressures in June, with the composite input price index down 2.1pts to a 21-month low of 58.4. Admittedly, this remained well above the long-run average (54.3). And despite declining a further 1.9pts, the composite output PMI (53.2) was similarly well above average (46.9). Within the survey’s other detail, there was a sizeable drop in the composite output component, down 2pts to a four-month low of 52.3, although this still left the quarterly average (53.2) up more than 1½pts compared with Q1, suggestive of another quarter of solid GDP growth supported by services (55.2 in Q2) despite a moderation in June. The manufacturing output PMI fell back into contractionary territory in June (48.4), with a decline in domestic and overseas demand too.

UK retail sales on track for modest growth in Q2 while consumer confidence improved ahead of yesterday’s rate hike
UK retail sales volumes in May were a touch stronger than expected, rising for a second successive month and by 0.3%M/M. That left them still down some 2.1%Y/Y and a touch more than 1.0% below the pre-pandemic level in February 2020. But the average level in April and May was 0.2% above the Q1 average, pointing to the likelihood of subdued positive growth in Q2 for a second successive quarter. Last month’s figures were flattered a little by sales at petrol stations (up 1.7%M/M, perhaps as households took advantage of the extra national holiday to travel), excluding which sales rose just 0.1%M/M. Sales in department stores and household goods stores fared well. And online sales were boosted by sales of outdoor-related goods and summer clothing, seemingly benefiting from much-improved weather later in the month. But sales from food stores fell 0.5%M/M, broadly reversing growth the prior month. While that might in part reflect higher food prices, the ONS reported anecdotal evidence that consumers spent more on take-aways over the holiday period. Certainly, higher prices continue to take their toll – in value terms, retail sales rose 0.6%M/M to be up 1.1%3M/3M and a hefty 4.8%Y/Y.

If the GfK survey is to be believed, consumer confidence in the UK continues to improve, with the survey’s headline index up 3pts in June to -24, the highest level since before the Russian invasion of Ukraine in January 2022 and 25pts above last autumn’s low. Improvement came from forward-looking indicators such as expectations for personal finances – which were similarly judged to be the best since end 2021 – and the economic outlook. But the climate for making major purchases was judged to have deteriorated slightly and remained historically low. And following yesterday’s 50bps hike from the BoE, which was greeted with some dismay in some parts of the media, and given the likelihood of additional tightening to come, we expect consumer confidence to weaken over coming months and retail sales to soften once again too.

Looking ahead, this morning’s flash PMIs will give an insight into economic momentum at the end of Q2. Having jumped to a twelve-month high in April (54.9) but edged slightly lower in May (54.0), the composite PMI is likely to suggest a further moderation in June. However, it should remain consistent with a slight increase in GDP in Q2 on account of growth in the services sector. Moreover, against the backdrop of rising demand and high growth in input costs related not least to wages, the services output price PMI is likely to remain well above the long-run average. In contrast, amid weak demand and falling input costs, the manufacturing output price index is likely to fall to its lowest since late-2020 and fall back close to the long-run average. will also bring the flash PMI surveys for June.

Flash German and French PMIs point to a weak euro area survey, with activity reportedly slowing markedly at end Q2
The flash PMIs from Germany and France just released point to a weak euro area survey when the results are published shortly. In Germany, the composite PMI dropped 3.1pts to 50.8, the lowest since February. Having last month pointed to surprising vigour, the German services PMIs unsurprisingly suggested a moderation in momentum in the sector, with the activity index down 3.1pts to a three-month low of 54.1. And the German manufacturing output PMI fell more than 3pts to an eight-month low of 44.3 to suggest that the factory sector’s challenges persist. But it was the French survey that was most eye-catching, with the composite PMI plunging almost 4pts to 47.3, the lowest since February 2021 to point to contraction for the first time since January. Unsurprisingly, as in Germany, the detail pointed to a drop in manufacturing production, with the respective output PMI down 0.5pt to 44.2. But the French survey also suggested that services have gone into reverse, also for the first time since January, with the respective activity PMI down 4.5pts to 48.0. We note, however, that yesterday’s INSEE survey results – which often tally more closely with French GDP – pointed to broadly stable activity in June consistent with growth of 0.1%Q/Q over Q2 as a whole. Meanwhile, the respective survey indices pointed to some further moderation in price pressures in both Germany and France. But they remained historically elevated in services, even as both input and output prices were reportedly falling in manufacturing.

Flash PMIs and Kansas Fed services activity surveys due from the US
Like elsewhere, the US will today see the release of the flash PMI surveys for June. These are expected to report a modest easing in the composite output index – down a little less than 1pt from May’s 13-month high of 54.3 – to signal ongoing growth in the economy and another solid quarter of GDP growth in Q2, supported by the services sector. The Kansas Fed services activity survey is also due. 

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