RIEB Discussion Paper Series No.2025-22

Title

The Role of Cyclical Inflation: Evidence from Japan

Abstract

Monitoring inflation is central to policymaking, yet it is often difficult to separate demand-driven inflation pressure from transitory price movements driven by sector-specific or institutional factors. This paper constructs a cyclically sensitive inflation (CSI) index for Japan by aggregating sectoral inflations with weights reflecting their correlations with business-cycle movements. An analysis of the estimated weights reveals that sectors susceptible to significant deviations from overall inflation, such as those affected by energy pass-through, policy shifts, weather, or rapid quality improvements, generally receive small or zero weights. Consequently, the CSI series remains robust under various alternative weightings. Using monthly data from 1983 to 2022, we find that macro-financial variables contain predictive information for CSI over time. In evidence from exogenous structural shocks using externally identified oil-market disturbances, CSI is less responsive on impact to transitory cost-push movements but reacts more strongly and persistently to demand-driven changes. Forecast comparisons indicate that CSI improves predictions for the headline CPI relative to traditional headline and core measures, although adding a standard slack indicator yields only limited and inconsistent improvements once CSI is included. Finally, the inflation decomposition analysis indicates that medium- and long-term inflation persistence is primarily associated with the cyclical component captured by CSI, rather than with residual acyclical fluctuations. Overall, CSI complements headline and core inflation measures by providing a timely measure of cyclical inflation pressures and aiding the understanding of persistent inflation dynamics.

Keywords

Cyclical inflation; Business cycle; Financial market; Inflation forecast; Inflation persistence; Japanese economy

JEL Classification

C32, E31, E32, E52, E58

Inquiries

Takuya SAKAGUCHI
Graduate School of Economics, Kobe University

Masahiko SHIBAMOTO
Research Institute for Economics and Business Administration (RIEB)
Center for Computational Social Science (CCSS)
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059