July 25 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in a decade as food and gasoline costs climbed, squeezing household budgets and slowing economic growth.

Core prices, which exclude fruit, fish and vegetables, increased 1.9 percent from a year earlier after gaining 1.5 percent in May, the statistics bureau said today in Tokyo.

Higher prices are forcing consumers and companies to cut spending, threatening the economy's longest postwar expansion. Bank of Japan board member Atsushi Mizuno said yesterday that the benchmark interest rate should stay at 0.5 percent for now because growth is slowing.

``The BOJ isn't concerned with the inflation rate itself, they're concerned about the impact of prices on growth,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo. ``They're not going to raise rates. They're going to be patient and wait to see if global growth or wages pick up.''

The gain in core prices matched the median estimate of economists surveyed by Bloomberg News.

The yen traded at 107.14 per dollar as of 12:19 p.m. in Tokyo from 107.33 before the report. The yield on Japan's 10- year bond fell 7 basis points to 1.58 percent after slumping U.S. home sales and German business confidence intensified concern that global growth will falter.

Soaring Across Asia

Inflation is soaring across the Asia-Pacific region, reports showed this week, complicating policy for central banks as economic growth cools. Malaysia's consumer prices rose at the fastest pace in 26 years in June. In Australia, the inflation rate surged to a two-year high in the second quarter.

The Bank of Japan is unlikely to raise rates even if inflation exceeds 2 percent, the higher end of the policy board's range for price stability, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. in Tokyo.

``Core prices will exceed the range's higher end soon,'' said Kanno, who used to work at the Bank of Japan. ``Even so, there's little chance for the central bank to raise rates because wages are barely growing and price gains aren't spreading to the overall economy.''

Governor Masaaki Shirakawa and his colleagues will keep the key rate, the lowest among major economies, on hold at least for the rest of the year, according to 31 of 33 economists surveyed by Bloomberg this month.

``I'm concerned about the combination of slower growth and high prices,'' Economic and Fiscal Policy Minister Hiroko Ota said. ``Consumers are increasingly conscious of inflation and we're concerned about the effect that's having on sentiment.''

Consumers Pessimistic

Consumer confidence fell in June to the lowest level in at least 26 years because prices of daily necessities are rising faster than wages. Goods purchased at least 15 times a year climbed 4.2 percent in June, almost twice the pace of the previous month. Wages rose 0.8 percent in May.

Household spending dropped 2.8 percent in June, a fourth monthly decline, economists estimate a government report to show next week. Weaker consumption and exports probably caused the economy to shrink last quarter, according to economists.

Core prices in Tokyo, a harbinger of nationwide inflation, advanced 1.6 percent in July from a year earlier, also the steepest gain in 10 years. Prices in the capital increased 1.3 percent in June.

Crude oil, corn and wheat all reached records this year. Japan imports more than 60 percent of its food requirements, the highest among developed countries. It imports almost all of oil. Gasoline prices surged to a record 181.5 yen a liter ($6.41 a gallon) earlier this month.

Corporate Service Prices

Prices companies pay for services such as transportation and rent climbed 1.2 percent in June from a year earlier, the central bank said today. That's the fastest pace this year.

Core consumer inflation will probably accelerate further in July as utilities and processed food makers raise retail prices.

Tokyo Electric Power Co. and nine other power companies increased charges on July 1, as did four gas providers including Tokyo Gas Co. Tokyo Electric also plans to adopt a new pricing system in September to better reflect higher fuel costs, a sign that electricity charges will climb further later this year.

Board member Mizuno said he expects core price gains to reach about 2.5 percent in ``the autumn.'' Still, he added, inflation isn't spreading because wage growth is moderate.

Excluding food and energy, a measure of inflation similar to that used in the U.S., Japan's consumer prices rose 0.1 percent in June from a year earlier. That's only the second time in the past 10 years that they have increased. The U.S. equivalent climbed 2.4 percent in June.

Japan's core prices will probably climb 1.8 percent in the year ending March 2009 and ease to 1.1 percent next fiscal year, the central bank said last week.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: July 24, 2008 23:20 EDT