Core CPI Below 2% for Five Months as Upstream Prices Surge

According to the Statistics Bureau of Japan (MIC), core CPI (all items excluding fresh food) rose 1.6% year on year in June 2026, remaining below the BOJ’s 2% price stability target for the fifth consecutive month since February. However, this was a 0.2 percentage-point acceleration from 1.4% in the previous month, so it cannot simply be characterized as a period of deceleration. Meanwhile, the BOJ’s corporate goods price index (CGPI) surged to 135.8, widening the gap between upstream goods prices and downstream consumer prices. This article examines the price trajectory for the second half of the fiscal year, focusing on two conflicting signals: the sustained decline in core-core CPI and the trimmed mean inflation rate remaining high at 2.7%.

Three CPI Measures: Headline Inflation Accelerates Slightly to 1.7% as Energy’s Downward Contribution Nearly Disappears

June’s CPI readings were ordered as follows: “headline 1.7% = core-core 1.7% > core 1.6%,” indicating a shift in the factors driving prices higher.

All figures are year-over-year (%).

Notably, the gap between core-core CPI and core CPI narrowed to 0.1 percentage point. In February 2026, the gap was 0.9 percentage point (2.5% versus 1.6%). This gap approximates the contribution of energy prices, and its narrowing means that energy’s downward pressure has nearly disappeared. The fact that headline CPI exceeded core CPI by 0.1 percentage point indicates that fresh food shifted to making a modest upward contribution.

The decline in core-core CPI is clear. From 3.3% in August 2025 to 1.7% in June, it narrowed by 1.6 percentage points. One competing interpretation is that “underlying inflation remains firm as long as core-core CPI exceeds core CPI.” However, given that the gap has narrowed to just 0.1 percentage point and core-core CPI itself has fallen to 1.7%, it is difficult to argue that underlying inflation remains firm based solely on the ordering of the indicators.

Service Prices: What the Step-Down in Year-on-Year Restaurant Inflation Indicates

Year-on-year inflation for eating out fell sharply from 3.9% in March to 1.1% in April and remained at just 1.2% in June. A 2.8 percentage-point slowdown in a single month is consistent with a base effect caused by the high growth rate in the same month a year earlier, but the data provided do not allow this effect to be distinguished from changes in demand. In any event, it is clear that the year-on-year increase in restaurant prices fell substantially from the spring onward. Prices for culture and recreation services were also in line with headline inflation at 1.7% in June, down from 2.6% in February.

Until recently, restaurant prices had risen 2–3 percentage points faster than headline inflation, pushing households’ perceived inflation above the statistical measure. In June, the 1.2% increase in restaurant prices was below headline inflation of 1.7%, indicating that the gap between perceived and measured inflation is narrowing. At least as measured by year-on-year growth, price pass-through in the services sector has reached a plateau.

Distance from the BOJ’s 2% Target: Core CPI Is 0.4 Percentage Point Below Target

Core CPI at 1.6% is 0.4 percentage point below the 2% price stability target. After reaching 2.0% in January, it remained below target for five consecutive months: 1.6% in February, 1.8% in March, 1.4% in April and May, and 1.6% in June.

That said, June’s 0.2 percentage-point acceleration from the previous month suggests that the 1.4% recorded in April and May may have been the trough. As an input into monetary policy decisions, however, the sustained decline in core-core CPI is more significant than a single month of core CPI falling below target. If core-core CPI remains firmly below 2%, this would pose a downside risk to the scenario of sustainably achieving 2% inflation through wages and service prices. Conversely, if the surge in CGPI discussed below is passed through in the second half of the fiscal year, core CPI could return to around 2%.

Underlying Inflation: Gap Between 2.7% Trimmed Mean and 1.5% Weighted Median

The BOJ’s measures of underlying inflation present a different picture from core CPI. In June, trimmed mean inflation was 2.7%, 1.1 percentage points above core CPI, while the weighted median was 1.5%, 1.2 percentage points below the trimmed mean.

The divergence among these three measures can be explained by the shape of the distribution of item-level price changes. The trimmed mean exceeds core CPI because items experiencing sharp declines that push down core CPI are removed through trimming the top and bottom 10% of observations. At the same time, the trimmed mean substantially exceeding the weighted median means that the distribution has a long right tail. In other words, a group of items subject to substantial price increases is pushing up the weighted average, while the increase for typical items around the middle of the distribution remains around 1.5%. Price increases are proceeding asymmetrically: “large increases for some items and modest increases for many items.”

The two measures have also moved in different directions. After the trimmed mean fell to 2.2–2.3% in January and February, it recovered to 2.8% in April and 2.7% in June. By contrast, the weighted median declined from 1.9% in the second half of 2025 to 1.5% in June. It is reasonable to conclude that the central tendency of inflation remains near 2%, but the breadth of price increases is receding. In the BOJ’s assessment of underlying inflation, the trimmed mean remaining high acts as a factor supporting a tightening bias, while the decline in the weighted median argues for caution.

Price Pass-Through Structure: CGPI Surges as CPI Slows

According to BOJ statistics, CGPI stood at 135.8 in June, up just 0.2 points from the previous month, but this followed a series of large increases of 3.6, 1.5, and 0.7 points. Over the 13 months of data provided, the index rose from 126.7 to 135.8, an increase of approximately 9 points, or about 7% in rate terms. The corporate services price index (SPPI) stood at 114.3 in June, down 0.5 points from the previous month, but up approximately 2.9% from 111.1 a year earlier.

The table shows a pattern in which only upstream goods prices are rising exceptionally sharply. However, the difference between the growth rates of CGPI and CPI cannot be interpreted straightforwardly as “prices have not been passed through.” CGPI has relatively large weights for goods and imports, while services account for approximately half of the CPI basket. Differences in their rates of change exist structurally even in normal periods, and part of the gap as of June is attributable to these differences in composition.

Against this backdrop, it is important that the acceleration in CGPI was concentrated in the spring of 2026. Pass-through from upstream to downstream prices typically involves a lag of around six months to one year, meaning that the most recent surge has not yet been reflected in CPI. SPPI’s 0.5-point decline in June indicates that pass-through pressure on the services side is limited for the time being, but a channel remains through which goods-related cost pressures could push up CPI in the second half of the fiscal year. The extent to which companies are passing higher costs on to prices cannot be measured directly from the data provided. Nevertheless, the widening gap between CGPI and CPI growth suggests that unpassed-through cost increases are accumulating ahead of the second half of the fiscal year.

Link to the Real Economy: Coincident CI at 118.2 Indicates an Expansionary Phase

The Cabinet Office’s Indexes of Business Conditions stood at 116.4 for the leading index, 118.2 for the coincident index, and 112.3 for the lagging index in June. The coincident index rose 0.3 point from 117.9 in May and has recovered from a trough of 113.9 in August 2025. After rising by more than 12 points from 104.3 in April 2025, the leading index flattened out at 116.4 in both May and June.

This combination indicates that CPI inflation is slowing even though the economy has not shifted into contraction in terms of overall activity. No movement indicating a loss of momentum in demand can be confirmed from the economic indicators. Accordingly, possible factors behind the CPI slowdown include supply-side and base-effect factors, such as the fading of energy’s downward contribution and the lower level of year-on-year growth in food and restaurant prices. However, ruling out the involvement of demand factors would require direct data on household consumption, so no firm conclusion can be drawn from the data covered in this article. The leading index’s shift to a flat trend is the first signal of a leveling-off in the pace of expansion and provides a clue for assessing demand-side inflationary pressure in the second half of the fiscal year.

Corporate Sentiment: Large Manufacturers’ DI Improves to 22, but Falls to 14 for the Outlook

In the BOJ Tankan survey for Q2 2026, the business conditions DI for large manufacturers rose to 22, improving by 5 points from 17 in Q1. The DI was 37 for large non-manufacturers, 17 for medium-sized manufacturers, and 9 for small manufacturers, with all three also improving from the previous survey. However, the outlook DI for large manufacturers fell to 14, widening the gap with the current reading to minus 8 points.

The assumed exchange rate is important for assessing the environment for corporate cost pass-through. The assumed rate for all industries and company sizes was revised toward a weaker yen, from ¥150.10 in Q1 to ¥152.57 in Q2. The upward revision to the weaker-yen assumption means that corporate plans are based on higher import costs, consistent with the surge in CGPI. The fact that the DI for small manufacturers, at 9, significantly lags the large-manufacturer reading of 22 indicates that differences in company size remain in the ability to pass higher costs on to selling prices. The decline in the outlook DI indicates that companies themselves are cautious about the sustainability of current favorable conditions and could act to restrain price-setting behavior in the second half of the fiscal year.

Breakdown of Factors on the Supply and Demand Sides

The strength of currently observable price pressures is asymmetric between the supply and demand sides.

• Supply side: In the latest available release of the Ministry of Finance trade statistics, imports increased from ¥8.7142 trillion in August 2025 to ¥10.3129 trillion in December. The trade balance was in surplus by ¥306.0 billion in November and ¥94.8 billion in December, but the rise in imports and the weaker-yen assumption in the Q2 Tankan indicate that the cost-push channel remains in place.
• Demand side: The latest available release of METI’s Current Survey of Commerce is for January 2025, showing retail sales of ¥12.7280 trillion, up 4.4% year on year. This is nominal growth; in real terms, after subtracting CPI inflation during the same period, the increase is limited.
• Implication: What can currently be confirmed is the persistence of supply-side cost pressures. Demand-side pressure cannot be assessed as of June because of publication lags.

Trade statistics and the Current Survey of Commerce have substantial publication lags, so they cannot be compared with June CPI on a same-period basis. Assessing demand-pull pressure therefore requires the coincident index of the Indexes of Business Conditions (118.2 in June) to be used as a supplementary indicator.

Market Reaction: TOPIX Rises to 4197, Extending Gains over the Past Two Weeks

TOPIX closed at 4197.20 on August 14. After plunging 2.72% on July 17 to close at 3919.21, it rose steadily from 3960.03 on August 3. Since August 10, it has moved progressively higher, recording 4100.61, 4139.00, 4176.04, and 4197.20.

The stock market’s performance is consistent in timing with an environment in which economic indicators are improving while core CPI remains below 2%. Slower inflation tends to reduce expectations of monetary tightening, while the upward revision to the weaker-yen assumption supports earnings prospects for export-oriented companies. However, the structure of market participants’ expectations cannot be established from stock-price data alone. If the surge in CGPI is passed through to CPI in the second half of the fiscal year and core CPI returns to 2%, adjustment pressure could emerge through a revision in interest-rate expectations. The July 17 plunge demonstrates the market’s high sensitivity to changes in the outlook.

Outlook: Assessing Whether Inflation Will Reaccelerate

The direction of prices in the second half of 2026 will be determined by the extent to which the upstream surge reaches downstream prices. The following four points should be monitored at present.

• Reversal in core-core CPI: Continued decline from 1.7% would indicate underlying weakness, while a turn higher would signal the start of CGPI pass-through.
• Movement in the weighted median from 1.5%: This is the most direct measure of whether the breadth of price increases is recovering.
• Trend in year-on-year restaurant inflation: Whether it recovers from 1.2% will determine the durability of price pass-through in the services sector.
• Tankan outlook DI and differences by company size: Unless the gap between the large-manufacturer outlook DI of 14 and the small-manufacturer DI of 9 narrows, pass-through will proceed unevenly.

As core-core CPI declined to 1.7%, the headwind from prices relative to nominal household income has weakened. However, with energy’s downward contribution having disappeared, movements in commodity prices and foreign exchange rates are now more likely to be reflected directly in headline CPI. Given the upward revision to the weaker-yen assumption, the possibility remains that this relief will prove temporary.

As a technical point, CPI index levels become discontinuous when the base year is revised, making comparisons of levels before and after the revision inappropriate. Year-on-year rates retain continuity through the chain-linking method, so underlying inflation should continue to be monitored on a YoY basis.

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This column was automatically generated by AI integrating e-Stat public statistics (Consumer Price Index), Bank of Japan statistics, and market data as a price trend analysis resource. This is not a recommendation to buy or sell any financial instruments. Please make investment decisions at your own responsibility and consult professionals as needed.