With companies seen slow in passing on the higher costs on to households, the uptick in wholesale inflation is unlikely to prod the Bank of Japan into withdrawing its massive stimulus any time soon, analysts say.
"We're seeing emerging signs of cost-push inflation. If this is not accompanied by rising wages, we could see Japanese consumers' purchasing power decline," said Mari Iwashita, chief market economist at Daiwa Securities.
The corporate goods price index (CGPI), which measures the prices companies charge each other for their goods, rose 4.9% in May from a year earlier, Bank of Japan data showed on Thursday, more than a median market forecast for a 4.5% increase.
It followed a 3.8% gain in April and was the biggest annual increase since September 2008, when a global spike in food and raw material costs pushed up a range of prices in Japan.
China also saw factory gate prices rise at their fastest annual pace in over 12 years, underscoring the tricky balance policymakers face in supporting their economies while keeping unwelcome inflationary pressures at bay.
The rise in raw material costs is particularly damaging for Japan, where state of emergency curbs to combat the pandemic are cooling consumption and making it difficult for retailers to charge households more for their goods.
Core consumer prices - the key benchmark the BOJ looks at in setting monetary policy - fell 0.1% in April from a year, marking the ninth consecutive month of decline.
"Rising commodities prices reflecting the global economic recovery is pushing up wholesale prices for a broad range of goods," Shigeru Shimizu, head of the BOJ's price statistics division, told a briefing on Japan's wholesale price data.
"The data shows companies are starting to pass on rising costs, though the gain in wholesale prices is driven more by external factors rather than domestic demand," he said.
Oil and coal prices jumped 53.5% in May, while prices of nonferrous metals were up 41.6%, as robust U.S. and Chinese demand boosted raw material costs, the BOJ data showed.
Wood and lumber prices were also up 9.7%, reflecting a shortage of raw material and rising demand across the world, Shimizu said.
Investors are increasingly worried pandemic-driven stimulus measures could supercharge inflation and force central banks to tighten policy, potentially curbing the recovery.
(Reporting by Leika Kihara; Editing by Christopher Cushing & Simon Cameron-Moore)
By Leika Kihara