(Bloomberg) -- Japan’s inflation slowed for the first time in more than a year, as government energy subsidies masked the stronger underlying trend ahead of the Bank of Japan’s first leadership change in a decade.

Consumer prices excluding fresh food rose 3.1% in February from a year ago, decelerating by more than a percentage point from the previous month on cheaper energy costs, the internal affairs ministry reported Friday. 

While the key gauge for the central bank slowed in apparent good news for incoming Governor Kazuo Ueda, a separate index that strips out fresh food and energy accelerated to the fastest pace in over four decades, pointing to quickening fundamental price strength. That could stoke market speculation that Ueda may have to move toward policy normalization sooner rather than later.

“The government measures are keeping a lid on energy, but I expect food prices to continue to rise for a while,” said economist Yuichi Kodama at Meiji Yasuda Research Institute. 

Overall inflation would have been as high as 4.4% without the impact of government subsidies for energy and travel, ministry data indicated. A key part of Prime Minister Fumio Kishida’s economic stimulus package announced last year was a 20% discount on household electricity rates, which began to feed into data in February. 

Tokyo’s figure, a leading indicator of national trends, earlier showed a similarly significant deceleration.

What Bloomberg Economics Says...

“Looking further ahead, we see core inflation dropping below 3% in March due to a comparison with high year-earlier figures. The BOJ forecasts slower inflation in the fiscal year starting in April and is unlikely to make any hasty retreat from its yield curve control policy.”

— Yuki Masujima, economist

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Inflation has spread beyond energy and is expected to persist for the foreseeable future. About 3,400 food items were raised in price in March, double the number of the same month last year, according to a Teikoku Databank report. 

In April, the prices of another 4,900 items, including imported wheat, are scheduled to be lifted. “There are absolutely no signs that the price hikes will end anytime soon,” the data firm said in the report.

In February data, processed food prices rose 7.8%, the fastest pace since 1976. Eating out also got pricier with hamburger prices soaring 25%. Consumer durables also showed double-digit gains, with new refrigerator prices jumping by more than a quarter.

To cushion the impact of rising prices, the government said Wednesday that it would add to existing price-relief measures, and is set to allocate more than 2 trillion yen ($15.3 billion) for the new efforts. The fresh support includes subsidies for liquefied petroleum gas, as well as handouts for low-income households and their children. 

“The fresh economic measures are expected to push prices down and boost consumption,” said Moe Nakahama, a research associate at Itochu Research Institute. “The latest spring wage negotiations also showed strong pay growth momentum.”

Large Japanese firms have decided to significantly raise employee wages amid historic inflation. In the latest annual spring wage negotiations, key unions and their employers reached a preliminary agreement to raise total wages by 3.8%, the most in three decades. 

Higher salaries and government subsidy programs may also help maintain relatively robust spending. For the BOJ, continued strength in paycheck growth is a key component to achieving its stated stable price goal.

“Good results are being seen in the spring wage negotiations, but as inflation remains elevated, many households find their real incomes are shrinking,” said Meiji Yasuda’s Kodama.

The Ueda-led central bank will be keeping a close eye on price developments for policy decisions. While the turmoil caused by the recent collapse of Silicon Valley Bank and the Credit Suisse buyout has rocked global markets, the BOJ is expected to keep its policy unchanged for now, following the path set by outgoing Governor Haruhiko Kuroda. 

The central bank will be updating its economic outlook at its April policy meeting after assessing its price forecast for the coming years, which now expects inflation to slow below 2% again during the upcoming fiscal year starting April. 

(Updates with additional details from report, economist comments)

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