Japan’s headline inflation rate hit 1.9% in July, the highest level this year, as energy costs increase amid the Iran war.

Core inflation — which strips out prices of fresh food but includes energy — was in line with expectations, coming in at 1.8%.

Energy prices rose for the first time since November 2025 despite government subsidies, due to high oil costs from the conflict in the Middle East. That showed up in wholesale inflation, which came in at 7.2% for July, with electricity charges being the largest contributor.

Fresh food prices also saw a sharp spike, increasing 7% compared to a 3.9% rise in June.

Analysts have previously told CNBC that the relatively low consumer inflation is due to subsidies handed out by Prime Minister Sanae Takaichi’s administration as it attempts to shield consumers from higher energy prices.

The so called “core-core” inflation rate — which strips out prices of both fresh food and energy, came in at 1.9%.

The Bank of Japan warned in its outlook report last month that core inflation was likely to accelerate to a level “clearly above” 2% from the second half of its 2026 fiscal year, which runs from September to March.

It cited wage increases being passed along into selling prices, the rise in crude oil prices and the recent depreciation of the yen. Inflation should then come down toward 2% as oil declines, it said.

The rise in headline inflation to 1.9% “strengthens our conviction that the BOJ’s next move is likely to be a rate hike in September,” according to Krishna Bhimavarapu, APAC economist at State Street Investment Management.

While domestic demand remains resilient, he noted, food prices warrant closer attention, given their larger weight in Japan’s CPI basket, adding that there could also be El Nino-related disruptions to global agricultural supply.

Food prices, especially for rice, were a hot topic in Japan last year, even costing the country’s then-farm minister Taku Eto his job after he made comments over receiving free rice from supporters.

Japan’s headline inflation rate eased for a fourth straight month in February as the economy cooled on stabilizing food prices, though soaring energy prices risk pushing up living costs.

The consumer price index fell to 1.3% last month, according to data released Tuesday, its lowest level since March 2022 and below the central bank’s 2% target. It was down from 1.5% in January.

Core inflation rate, which strips out fresh food prices, moderated to 1.6% in February, missing economists’ forecast for 1.7% rise and compared with 2% rise in January.

The so-called “core-core” inflation, excluding prices of fresh food and energy, came in at 2.5%, compared with 2.6% in January.

The Bank of Japan has pegged its forecast for core inflation and “core-core” for fiscal 2026, which begins April 1, at 1.9% and 2.2%, respectively.

The central bank has projected that year-on-year increase in consumer prices may fall below 2% in the first half of this year, due to government efforts to ease living costs and stabilize food prices.

Prime Minister Sanae Takaichi had pledged to suspend an 8% food tax for two years during the election campaign.

Last week, the BOJ held its interest rate steady at 0.75% as expected while cautioning upside risks to inflation stemming from the conflict in the Middle East, which has sent energy prices soaring.

Japan’s economy expanded just 0.1% year-on-year in the fourth quarter last year, narrowly avoiding a technical recession and slowing from 0.6% growth in the third quarter.

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