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(Bloomberg) — Inflation in Tokyo accelerated for a second month in December, as the government temporarily phased out utility subsidies, a result that will likely support expectations of an interest rate hike next year.

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Consumer prices excluding fresh food rose 2.4% in the capital, quickening from growth of 2.2% the previous month, the Ministry of Internal Affairs reported Friday. The reading was the strongest since August, though a shade softer than economists’ consensus for a 2.5% gain. 

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The acceleration was largely driven by higher energy prices, following the phasing out of subsidies for gas and electricity bills. The measure had shaved 0.31 percentage point from the overall price index a month earlier. 

Tokyo’s figures serve as a leading indicator for national trends. Separate data showed the labor market staying relatively tight in November, while factory output declined on a monthly basis after robust gains in September and October. Retail sales came in stronger than forecast.

While the uptick in inflation was largely due to the impact of the wound down subsidies, the data suggest that price gains remain solid, likely keeping the Bank of Japan on track to consider raising interest rates in the coming months. 

BOJ Governor Kazuo Ueda reiterated the bank’s stance on Wednesday, stating that the bank will adjust the degree of monetary accommodation based on developments in economic activity, prices and financial conditions. While he left the door open for a January hike, some market players and economists have started to shift their base case scenarios for an increase to March. 

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The labor data showed ongoing tightness in the job market, keeping pressure on companies to raise wages to retain and attract workers. The jobs-to-applicants ratio was unchanged at 1.25 in November and the jobless rate remained unchanged at 2.5%, according to the labor ministry. 

The industry ministry reported that industrial production fell 2.3% in November from a month earlier, while retail sales increased 1.8%.

“A solid pickup in this early indicator of the national CPI would be consistent with the BOJ’s assessment that inflation is starting to stick around the 2% target. We see the BOJ lifting its target rate from 0.25% to 0.50% in January, and then delivering two more 25-bp hikes, in April and July, taking it up to 1.0%.”

— Taro Kimura, economist

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