The impact of these easing measures on the CPI rate of increase was a depressing factor until the October–December quarter of 2023. However, it became a boosting factor in the January–March quarter of 2024. The termination of the easing measures on electricity and city gas bills is expected to raise the rate of increase by approximately 0.7% in the July–September quarter of 2024. On a fiscal year basis, the impact of these easing measures on the core CPI growth rate is expected to be around -0.7% in FY 2022, -0.3% in FY 2023, 0.5% in FY 2024, and 0.3% in FY 2025.
Energy prices have been negative compared to the previous year since February 2023. However, the unit price of the levy to promote renewable energy generation on electricity bills will be raised from 1.40 yen to 3.49 yen per kWh from May 2024, and discounts on electricity and city gas bills will be halved in May 2024 (reflected in the CPI in June) and eliminated after June. This will turn the rate of increase in electricity and city gas prices positive again, contributing to an increase in the core CPI. The rate of increase in energy prices is expected to reach high double-digit growth compared to the previous year around summer 2024, expanding its contribution to the core CPI increase to approximately 1%.
Service prices have been growing in the low 2% range. The pace of increase is likely to accelerate further because the rate of spring wage increases in 2024 will be much higher than the previous year.
Compared to goods, service prices are largely determined by labor costs. The linkage between service prices and wages is significant, and the rate of increase in service prices in 2023 was 1.8% compared to the previous year, roughly in line with the base increase of approximately 2% in 2023. Given that RENGO’s tabulation results show that the "wage increase portion," which corresponds to the base salary increase, is 3.57% (5th tabulation results) for the 2024 spring wage increase rate, the rate of increase in service prices is expected to rise to the 3% level.
The core CPI is expected to remain in the upper 2% range compared to the previous year in the first half of FY2024 as the slowdown in the growth rate of food (excluding fresh food) is offset by the accelerated pace of energy price hikes. After the start of FY2025, prices are expected to fall below the BOJ’s 2% price target.
