Japan's headline inflation rate hit 1.9% in July, the highest level this year, as energy costs increase amid the Iran war.

Core inflation — which strips out prices of fresh food but includes energy — was in line with expectations, coming in at 1.8%.

Energy prices rose for the first time since November 2025 despite government subsidies, due to high oil costs from the conflict in the Middle East. That showed up in wholesale inflation, which came in at 7.2% for July, with electricity charges being the largest contributor.

Fresh food prices also saw a sharp spike, increasing 7% compared to a 3.9% rise in June.

Analysts have previously told CNBC that the relatively low consumer inflation is due to subsidies handed out by Prime Minister Sanae Takaichi's administration as it attempts to shield consumers from higher energy prices.

The so called "core-core" inflation rate — which strips out prices of both fresh food and energy, came in at 1.9%.

The Bank of Japan warned in its outlook report last month that core inflation was likely to accelerate to a level "clearly above" 2% from the second half of its 2026 fiscal year, which runs from September to March.

It cited wage increases being passed along into selling prices, the rise in crude oil prices and the recent depreciation of the yen. Inflation should then come down toward 2% as oil declines, it said.