(Bloomberg) -- Inflation in Tokyo re-accelerated for the second time in three months in June, an outcome that supports expectations the central bank will raise its inflation forecast next month.

Consumer prices excluding fresh food increased 3.2% in the capital from a year earlier, rising at a slightly faster pace than last month’s revised figures, according to the ministry of internal affairs Friday. 

The smaller drag from electricity prices was the main cause of the acceleration, following a government decision to allow utilities to raise charges from this month. But the price growth was slower than economists had forecast.

Separate data showed factory output declined in May from the previous month for the first fall since January, as recovery momentum sputtered more than expected. The labor market remained relatively tight, with the jobless rate unchanged at 2.6%, although the number of jobs available for every applicant slightly decreased to 1.31.

The slightly faster pace of price gains supports the view that the Bank of Japan may revise up its inflation projections when it meets at the end of July. Around a third of economists surveyed by Bloomberg forecast policy change at the meeting largely because of expectations that the BOJ will have to bump up its price forecasts.

“It’s clear that Japan’s inflation has been stronger than the BOJ expected. There is no doubt that the BOJ will raise its inflation forecast for this year next month,” said Yoshiki Shinke, senior executive economist at Dai-Ichi Life Research Institute. “The question is how much and how quickly they will try to match the projection with reality.”

The central bank is widely expected to revise up its 1.8% price projection for this fiscal year at next month’s meeting, narrowing the gap with private economists’ prediction of 2.6%.

Read More: Japan’s Higher Power Prices Help Utilities, Add to Inflation

Still, while Tokyo prices, a leading indicator of the national trend, show that businesses are continuing to pass their costs onto consumers, it’s unclear if Japan’s cost-push inflation has turned into price growth led by demand.

A deeper measure of the inflation trend that strips out fresh food and energy prices unexpectedly decelerated, slowing to 3.8%. The gauge is free from the impact of government measures for energy prices, which still hold down inflation by about 1 percentage point. Overall prices also slowed down a touch as electricity costs dragged less.

What Bloomberg Economics Says...

“Tokyo’s slower-than-expected June inflation points the Bank of Japan in the direction we see it going well into next year — holding its stimulus settings.”

— Taro Kimura, economist

For the full report, click here. 

Speaking at a panel with the Federal Reserve and European Central Bank’s chiefs this week, Governor Kazuo Ueda underscored the BOJ’s outlier status. Ueda said he needs reasonable certainties that inflation will pick up after an expected slowdown toward the end of this year, before deciding on any policy turnaround.

“It’s fair to assess that the economy is getting normalized on the back of resilient domestic demand, but that doesn’t mean the BOJ will have to tighten policy,” said Taro Saito, head of economic research at NLI Research Institute. 

“I think it’s highly unlikely that the kind of inflation the BOJ wants – accompanied by thorough cost passing and wage growth – will settle in. Ueda seems cautious about that and that’s why I think he won’t easily tighten.”

The impact from the global slowdown on Japan is another factor the BOJ is closely watching. Factory data showed a 1.6% drop in output from the previous month, although production levels were still 4.7% higher than a year earlier.

Output from the auto sector fell 8.9% from the prior month for the biggest drop since supply snarls held up production a year ago. Lithium storage batteries and chip-measuring devices were among other items logging falls, while chip-manufacturing equipment output gained. 

“Production has clearly stalled,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Car output has helped boost overall production but it seems to be decelerating now, with the rest doing worse. It’s likely that rate hikes by US and European central banks will hit their economies more clearly and that will in turn affect Japan’s exports.”

How production fares going forward will be closely watched as market participants try to gauge the fate of the global economic slowdown.

(Updates with more details from reports, economist comments)

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