(Bloomberg) -- Inflation in Tokyo continued to outpace expectations, jumping above 4% and underscoring how price gains may be stronger than the Bank of Japan’s current view. 

Consumer prices excluding fresh food rose 4.3% in the capital in January, accelerating from December’s revised figure of 3.9%, according to the ministry of internal affairs Friday. The reading was the strongest since 1981 and beat analyst estimates, rising further beyond the central bank’s 2% target. Hotel prices were the biggest driver behind the acceleration.

The stronger than expected reading prompted the yen to gain to around 129.50 against the dollar from just below 130 immediately before the data was released.

The result comes amid intense speculation that the BOJ may shift policy, as the end of Governor Haruhiko Kuroda’s decade-long term in April continues to fuel expectations that change may be in the pipeline. It also comes a day after the International Monetary Fund recommended the Japanese central bank increase flexibility for its long-term yields as inflationary risks rise.

The fund advised the BOJ to be prepared for a scenario where price growth overshoots expectations, a trend that has been seen in recent months. Speculation over policy has also intensified since December, when the BOJ jolted markets around the world by suddenly doubling its 10-year yield band.

“Economists including myself have to admit the fact that the results have been beating our expectations, which means our views are influenced by the past norm of inflation,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “Now I see a chance that inflation may peak at a higher level and become stickier than I had expected.”

Tokyo’s data is a leading indicator of the national trend, and its acceleration implies that the country’s price growth will also strengthen further. Still, many economists see January as the peak of the current inflation wave and expect prices to begin slowing again from February, when the effects of Prime Minister Fumio Kishida’s latest stimulus measures gain further traction.

The impact of subsidies for power bills is expected to push down the overall nationwide inflation figure by about 0.9 percentage point in February, according to a Bloomberg calculation, assuming a 20% discount on electricity charges.

The measures, part of an overall stimulus package with a fiscal outlay of 39 trillion yen ($301 billion), also includes funding for subsidies for gasoline and some foodstuffs. 

That helps explain why the BOJ continues to insist that price growth will cool. In its latest outlook report released last week, the central bank kept its inflation forecast for the next two years below 2%, maintaining the idea that the current cost-push price hikes will not stick.

What Bloomberg Economics Says...

“Looking ahead, we see core inflation slowing to around 3.1% in 1Q from 3.7% in 4Q22. Subsidies to lower the cost of electricity and gas starting in January (and affecting CPI from February) could reduce core CPI inflation by as much as 0.7 percentage point this quarter.”

— Yuki Masujima, economist

For the full report, click here 

Still, utility companies are now requesting the government to raise power prices in response to surging fuel costs and a weak yen, complicating the outlook. Tokyo Electric Power Co. announced earlier this week that it had applied to lift household electricity prices by about 30% from June, an increase that would outweigh the impact of the latest government subsidies if approved. 

Processed food continued to be the single largest contributor to price growth, followed by energy prices. While the gains in January were a fraction softer than in the previous month, more than 4,000 food items will be raised in price in February, the most since October, according to a Teikoku Databank report. The data firm says that only 4.1% of surveyed companies have been able to fully pass on costs to customers so far. 

Accelerating price growth has been gradually eroding consumer appetite. Household spending fell for the first time in three months in November, and retail sales in the same month also declined despite a rebound in demand from foreign tourists.

“The strength of inflation is increasing,” said Atsushi Takeda, chief economist at Itochu Research Institute. “The move to pass on costs continues to spread, and from here on we’ll also get the impact from wage gains. I don’t think the price trend is on a major downswing.” 

(Updates with further details, economist comments)

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