Inflation in Tokyo accelerated for a third month in July, keeping the door open to a possible interest rate hike when the central bank’s policy board meets next week. 

Consumer prices excluding fresh food rose 2.2% in the capital, versus 2.1% in June, the Internal Affairs Ministry reported on Friday. The reading matched the consensus estimate. Energy prices drove the gains, with electricity prices rising 19.7% on year. Gains in prices for processed food slowed a tad. Hotel prices also grew at a slower pace, as lodging subsidies were phased out a year earlier.

Tokyo’s figures are leading indicators for the national data due in August.

The data will be carefully parsed by Bank of Japan (BOJ) officials, as they continue to look for opportunities to normalise policy after years of aggressive easing. The figures come a day after data showed service prices among businesses in Japan jumped in June by the most in about 33 years. 

At the same time, Friday’s figures appeared to show companies are struggling to pass on higher costs to customers due to weak consumer spending, according to Yoshiki Shinke, a senior executive economist at Dai-Ichi Life Research Institute.

“Both a rate hike or no hike is possible in next week’s BOJ policy decision,” Shinke said. “Today’s data weren’t disappointing, but they also won’t be a factor to give them more confidence regarding the inflation trend. If I were to decide, I would wait to see more data.”

The BOJ is set to announce details of its plan to reduce debt buying at the July 31 conclusion of its two-day policy meeting. While only about 30% of BOJ watchers say authorities will hike interest rates in that meeting, more than 90% see the risk of such a move, according to a Bloomberg survey published earlier this week.

BOJ governor Kazuo Ueda has repeatedly said the central bank is looking for signs that higher wages will spur consumption and kindle demand-led price growth that anchors inflation above its 2% target.

The core inflation reading got a lift from the end of government utility subsidies in June. Overall inflation gained 2.2%, compared with 2.3% in June, while inflation excluding fresh food and energy increased 1.5%, slowing from 1.8%. 

The gauge for service prices may inject some caution into next week’s BOJ board discussions. The reading slowed to a 0.5% increase in July, compared with 0.9% in June.

In addition to detailing its bond operation plans, the central bank will update its forecasts for inflation and growth in the meeting. Currently, it expects its benchmark price gauge to stay above its 2% target in the year ending in March, before falling back below that level in the following fiscal year. 

Recent data has shown weakness in consumption, which is complicating the BOJ’s decision over whether to raise interest rates, according to people familiar with the matter. 

The BOJ expects spending to pick up at some point, strengthening demand-driven inflation. Prime Minister Fumio Kishida has touted a one-off tax rebate that started in June as a potential driver to help the country exit deflation once and for all. 

The yen’s historic weakness is poised to add upward pressure on consumer inflation via higher imports of goods, energy and materials. Ueda has said he is watching the impact of the yen on prices and growth as a potential factor to lead to policy changes.

The yen has given back some of its recent gains against the dollar after US gross domestic data came in stronger than expected. Japan’s currency was trading around 153.60 on Friday morning in Tokyo.

  - Bloomberg