By Leika Kihara
TOKYO (Reuters) -Core consumer inflation in Japan's capital slowed sharply in June due to temporary cuts to utility bills but stayed well above the central bank's 2% target, keeping alive market expectations for further interest rate hikes.
Steady rises in services prices added to continued increases in the cost of food including Japan's staple rice, data showed on Friday, highlighting broadening price pressures piling on an export-reliant economy facing headwinds from steep U.S. tariffs.
The data will be among factors the Bank of Japan will scrutinise at its next rate review on July 30-31, when the board will issue fresh quarterly growth and price forecasts.
The Tokyo consumer price index (CPI), which excludes volatile fresh food costs, rose 3.1% in June from a year earlier, government data showed, below a median market forecast for a 3.3% gain.
It slowed from a 3.6% rise in May due largely to the resumption of fuel subsidies and temporary cuts to water charges in Tokyo aimed at helping households weather the summer heat.
A separate index for Tokyo that strips away both fresh food and fuel costs – closely watched by the BOJ as a measure of domestic demand-driven prices – rose 3.1% in June from a year earlier after a 3.3% gain in May, the data showed.
“The slowdown in headline inflation in Tokyo in June partly reflects the resumption of energy subsidies,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics.
“With underlying inflation still running well ahead of the Bank of Japan's forecasts, we still expect the Bank to hike rates in October,” he said.
The price of food, excluding volatile items like vegetables, rose 7.2% in June from a year earlier, accelerating from the previous month's 6.9% gain.
Highlighting the hit to households, the data showed those in Tokyo paid 89% more for rice compared with a year ago, 48% more for a bar of chocolate and 50% more for a bag of coffee beans.
Service-sector inflation stood at 2.1% in June after hitting 2.2% in the previous month.
The BOJ exited a decade-long, radical stimulus programme last year and raised short-term interest rates to 0.5% in January on the view Japan was on the cusp of sustainably hitting its 2% inflation target.
While the central bank has signalled readiness to raise rates further, the economic impact of higher U.S. tariffs forced it to cut its growth forecasts in May and complicated decisions around the timing of the next rate increase.
Further muddling the policy outlook, consumer inflation has exceeded the BOJ's 2% target for more than three years as companies continue to pass on rising raw material costs.
