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(Bloomberg) — Consumer price growth in Tokyo unexpectedly quickened for the first time in four months in October, indicating that inflation is proving stickier than expected as the Bank of Japan prepares to set policy next week.

Consumer prices excluding fresh food rose 2.7% in the capital, with growth accelerating from 2.5% in September as hotel prices shot up and electricity subsidies were pared back, figures from the ministry of internal affairs showed Friday. 

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Service prices rose 2.1%, the fastest clip since early 1994, excluding years when there was a sales tax increase. Tokyo’s figures serve as leading indicators of national data, which will be announced next month. 

Friday’s data suggest that upward pressure on prices may be stronger than BOJ Governor Kazuo Ueda’s current view, potentially increasing the likelihood that the central bank will revise up its price outlooks for this year and next when the policy board meets next week. 

“These are strong figures. This shows businesses are passing costs on to consumers more than expected,” said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute. “Japan’s underlying inflation is probably increasing.”

The sticky inflation will help fuel already heightened market speculation over a change to the BOJ’s yield curve control program. Such speculation continues to smolder after a further slide in the yen and a rise in long-term yields toward the BOJ’s de facto ceiling.

Ueda has said he expects price pressure to ease, a projection in line with recent trends. At the national level, consumer prices excluding fresh food rose 2.8% from a year earlier in September, sliding below 3% for the first time in more than a year.

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The acceleration in Tokyo’s price growth was driven by a 43% gain in hotel and accommodation costs and a halving of subsidies that have held down electricity bills. Those factors outweighed a drag on the index as prices for processed food rose at a slower pace.

Consumer prices excluding fresh food and energy, a deeper gauge of inflationary trends, rose 3.8%, slowing from a revised pace of 3.9% in September but beating the consensus call for 3.7%.

What Bloomberg Economics Says…

“Tokyo’s surprisingly hot October CPI will put the Bank of Japan on high alert to the risk that inflation overshoots its projections when policymakers meet next week.”

— Taro Kimura, economist.

For the full report, click here. 

The BOJ is also set to update its quarterly economic outlook report at its two-day meeting concluding on Tuesday. The bank is expected to revise up its projection for the key inflation gauge for the current and next fiscal year, likely resulting in three consecutive years of price increases exceeding the 2% target.

Still, the bank is seen keeping its price outlook for fiscal year 2025 unchanged at around 1.6%, raising questions about whether the country has achieved sustainable inflation.

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Friday’s upside surprise comes as Prime Minister Fumio Kishida faces the challenge of putting together an economic package that’s meant to ease the impact of rising prices on households. The government plans to extend energy subsidies through the end of April, according to a draft of the economic stimulus package obtained by Bloomberg.

The electricity and gas subsidies alone reduced Tokyo’s overall inflation figures by 0.45 percentage point in October. That’s about half the impact of the previous month, as subsidies were scaled back. 

Kishida said Thursday he plans to enact a one-off income tax cut worth ¥40,000 per person and provide an additional ¥70,000 to low-income families.

Finance Minister Shunichi Suzuki said the tax rebate would help ensure that Japan achieves its goal of ending deflation by supporting people’s disposable income.

High uncertainties remain over future price developments. Oil has been rocked since the Oct. 7 Hamas attack on Israel, initially surging on fears of a wider conflict but then paring those gains as the war remained contained.

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Recent yen weakness has also reignited the risk of import-driven inflation. The yen continues to hover around 150 to the dollar, a level that prompted the Japanese government to intervene in the market last year.

Hot prices can be both an opportunity and a risk for Japan’s wage trends, an area that both Kishida and Ueda are watching closely. Rengo, the country’s biggest trade union federation, demanded higher pay increases for next year compared with this year, partly citing ongoing inflation.

Meanwhile, some small companies have already said it will be difficult to maintain pay hike momentum as costs are rising, and it’s not easy to pass that burden on to consumers.

(Updates with more details, economists’ comments)

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