Tokyo’s consumer price index (CPI) excluding fresh food rose 1.8% in August from a year earlier, marking the third consecutive month of accelerating inflation despite government efforts to temper energy costs. The data, released Friday by the internal affairs ministry, aligned with market expectations and strengthened the case for a potential Bank of Japan (BOJ) interest rate hike in September.

The August rise followed a 1.7% increase in July and was supported by higher costs in durable goods related to education and recreation, increased medical fees, rising rents, and restaurant prices. The index that excludes both fresh food and energy climbed 2%, while the overall CPI rose 1.9%. Energy prices, however, declined by 2% for the month, reflecting the impact of government subsidies aimed at limiting gasoline prices to around ¥170 per liter and reducing electricity and some natural gas costs through a program running from July to September.

The Tokyo CPI is seen as a leading indicator for national inflation trends, though local government interventions, such as cuts to school fees, have occasionally skewed the figures. Service prices, an important gauge of sustained inflation, increased 1.4% year-on-year, while food prices excluding fresh items rose 3.6%, a slowdown from July. Notably, rice prices fell 14.2%, the sharpest drop since May 2005, reversing a substantial increase from the previous year.

The ongoing yen weakness, despite diplomatic efforts including a coordinated intervention between the U.S. and Japan in July, has contributed to elevated inflation risks, further fueling speculation about central bank tightening. BOJ Deputy Governor Ryozo Himino signaled openness to a rate increase, stating Thursday that attention should be paid "to the upside risk to prices" more than before. Market instruments indicate an approximately 82% probability of a rate hike in September.

In addition to inflation dynamics, Japan’s labor market remains tight. The jobless rate declined to 2.4% in July, with the job-to-applicant ratio steady at 1.18, meaning there were 118 job openings for every 100 applicants. This tightness has underpinned wage growth, as companies compete for workers.

Economic analysts suggest that inflation pressures could intensify as businesses pass increased input costs to consumers. Yukihiro Morita, senior economic analyst at Meiji Yasuda Research Institute, noted that companies are already transferring higher expenses, such as packaging materials, onto prices and expect this trend to accelerate in the coming months. The risk of continued upward pressure on inflation remains substantial as the BOJ weighs its next policy move.