TOKYO -- Consumer prices in Japan are leveling off amid stalling energy prices, a development that stands to boost consumer spending but keep the country in deflation longer and feed speculation of additional monetary easing.
August's consumer price index, released Friday, rose 3.1% on the year, excluding fresh foods -- 0.2 point less than the growth rate for July. And after also adjusting for higher prices from the April 1 consumption tax hike, the figure comes to a measly 1.1%.
Consumer prices have been rising since Prime Minister Shinzo Abe took office in late 2012, thanks to such factors as large-scale monetary easing. Prices increased 1.5% in April, adjusting for the tax hike, and seemed to be approaching the 2% target that the Bank of Japan deems necessary to break free of deflation.
But most of the boost came from soaring prices for energy, such as gasoline. Now the strong dollar is dragging the energy market down, causing crude oil prices to drop and putting less upward pressure on consumer prices in Japan. The energy index including electricity and gasoline prices rose just 6.8% on the year in August -- 2 points less than in July.
Many believe that consumer prices will stall now that energy prices are losing steam. "There is a strong possibility that the growth rate will fall short of 1% in October, adjusting for the tax hike," says Yoshiki Shinke of the Dai-ichi Life Research Institute.
BOJ Gov. Haruhiko Kuroda has optimistically maintained that the rate will not slide below 1%. The bank expects economic recovery to push up wages, boosting prices in the service sector, such as those in the food service and shipping industries. Whether Japan can escape the clutches of deflation appears to hinge on service-sector prices, which are determined largely by labor costs.
But the index for services rose only 1.8% in August, compared with the 3.8% jump for durable goods. Even the short-staffed food service industry was largely level from May through August. The rise in wages does not seem to have triggered much of a gain in consumer prices yet.
With the yen weakening to about 109 against the dollar, import prices are soaring again. The price of cheese, for example, has risen on high ingredient costs. The index for nonfresh foods soared 3.8% in mid-September in Tokyo's 23 wards -- a sharper increase than in July.
Surging food prices will impact individuals' consumption. There are both upward and downward pressures on consumer prices, and the government and the BOJ must judge the future effects on the Japanese economy.
Kuroda has repeatedly said that he will implement additional easing measures should consumer prices fall short of expectations. If CPI growth disappoints in September by slipping under 1%, it will likely feed market anticipation of more easing.