A big drop in utility prices (-8.8% YoY) was the main reason for the cooling of headline Tokyo inflation, while fresh food (4.1%) and transport & communication (3.3%) prices rose. Inflation rose 0.1% month on month, mostly thanks to services prices rising by 0.2%. Despite a sharp cooling of headline inflation, core inflation excluding fresh food and energy rose 3.0%, signalling underlying price pressures remain firm.
Meanwhile, a tight labour market is expected to support a sustained trend of wage growth. The unemployment rate unexpectedly fell to 2.3% in July (vs 2.5% in June, market consensus), and the job-to-application ratio stayed at 1.22. We believe a structural shortage of labour supply will increase wage growth pressures going forward, resulting in inflation staying around 2%.