Consumer inflation in Japan's capital perks up, Ukraine crisis to add pressure

By Takahiko Wada and Leika Kihara

TOKYO (Reuters) -Consumer inflation in Japan's capital accelerated in February at the fastest annual pace in more than two years, suggesting that soaring fuel and food costs will weigh on consumption and the country's fragile economic recovery.

Analysts expect the crisis in Ukraine to further pace up inflation in coming months through a spike in global energy and commodity prices, adding to woes for Japan's economy that is heavy reliant on raw material imports.

"Import costs were already rising, so any further rise in raw material prices from the Ukraine crisis would deal a huge blow to Japan's consumption and corporate profits," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

The overall consumer price index (CPI) for Tokyo, considered a leading indicator of nationwide trends, rose 1.0% in February from a year earlier, marking the fastest pace since December 2019, government data showed on Friday.

The Tokyo core CPI, which excludes volatile fresh food but includes energy costs, increased 0.5% in February from a year earlier, accelerating from a 0.2% gain in January. It compared with a median market forecast for a 0.4% gain.

A 24.2% spike in energy prices was the key driver of the rise in core CPI, underscoring the pain higher fuel costs are inflicting on households and retailers.

Prices also rose for a range of foods and services, though the increase was moderated by a temporary drag from cuts in cellphone fees, the data showed.

"If energy prices continue to rise, Japan's core CPI may hit 2% in April and may not slow much thereafter," Shinke said.

Prices for international crude benchmark Brent shot above $105 a barrel after Russia, one of the world's top oil producers, attacked Ukraine.

Prime Minister Fumio Kishida said the government was ready to take further steps to curb fuel costs, on top of subsidies already put in place, to cushion the blow to households.

But there is uncertainty on how much such moves could support consumption with rising raw material costs already leading to higher prices for various grocery products including snacks, soy sauce and cooking oil.

Japan's economy has recovered from the COVID-19 pandemic's initial hit thanks to robust global demand, though curbs on economic activity to combat rising cases of the new Omicron variant have weighed on consumption.

Sluggish consumption and weak wage growth have discouraged firms from passing on higher costs to households, keeping consumer inflation distant from the central bank's 2% target.

(Reporting by Takahiko Wada and Leika Kihara; Editing by Leslie Adler and Sam Holmes)

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