Nov. 30 (Bloomberg) -- Japan's economy showed its first signs of inflation this year after gasoline prices surged.

Core consumer prices, which exclude fresh food, climbed 0.1 percent in October from a year earlier, the first increase since December 2006, the statistics bureau said today in Tokyo. The median estimate of 40 economists surveyed was for no change.

The gain probably won't be enough to persuade the Bank of Japan to raise interest rates as the U.S. economic slowdown and financial-market turmoil cloud the outlook for growth. Falling prices in Japan have hindered the central bank's plans to lift rates from 0.5 percent, the lowest among major economies.

``Normally this report would provide support for the Bank of Japan,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo, who forecasts an August rate increase. ``But the CPI numbers aren't strong enough to wipe out rising risks surrounding the U.S. and global economy.''

The unemployment rate stayed at 4 percent in October after rising in each of the two previous months, the bureau said. The rate has risen from a nine-year low of 3.6 percent in July. The number of jobs available for each applicant had the steepest decline in six years, the Labor Ministry said.

Household spending growth slowed to 0.6 percent in October from 3.2 percent in September.

The yen traded at 110.15 per dollar at 11:52 a.m. in Tokyo from 109.84 before the reports were published. The yield on Japan's 10-year bond fell 1.5 basis points to 1.47 percent.

Rate Increase `Difficult'

Bank of Japan Deputy Governor Toshiro Muto said this month that the U.S. housing recession and market woes make it ``difficult'' to decide when to raise rates. Mizuho Securities Co., UBS AG and Goldman Sachs Group this month postponed predictions for the next rate increase from the first quarter of 2008 to at least the third quarter.

``Financial markets will keep gyrating, probably more frequently than we've seen,'' said Yasunari Ueno, chief market economist at Mizuho. ``It'll take time before fears about a credit crunch and economic recession ease and markets regain a more optimistic outlook.''

Federal Reserve Chairman Ben S. Bernanke said in a speech late yesterday that volatility in credit markets has ``importantly affected'' the U.S. economy's prospects.

The most Japan's consumer price index has risen in the past nine years is 0.3 percent in August 2006. The Bank of Japan raised the key overnight lending rate in July 2006 after holding it near zero for more than five years to overcome deflation. Policy makers doubled the rate to 0.5 percent in February.

Progress `Stagnated'

``The progress toward stamping out deflation has stagnated,'' Economic and Fiscal Policy Minister Hiroko Ota said today. She said oil contributed most of October's gain and the government needs to watch the effect of higher energy costs on consumer sentiment and corporate profits.

Excluding energy as well as food, consumer prices fell 0.3 percent in October. By that measure, prices haven't risen for nine years.

Rising prices of crude oil, wheat and aluminum are prompting some companies to pass on costs to customers.

Asahi Breweries Ltd., Japan's second-biggest brewer, said today it will increase beer prices to cover the rising cost of brewing malt and aluminum. Meiji Dairies Corp., Japan's biggest maker of milk and ice cream, this week said it will raise prices of 58 products because of rising costs of dairy ingredients.

Those increases have failed to spur core prices as competition forces manufacturers and retailers to offer discounts on flat-panel televisions and notebook computers.

Falling Wages

``The weight of food in the consumer price index is small, and higher costs of daily necessities tend to prompt consumers to cut down non-essential spending,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``Price gains won't accelerate without wage increases.''

Wages declined in nine of the 10 months to September and mid-year bonuses, about 10 percent of a worker's annual income, dropped for the first time in three years.

Seiji Nakamura, a Bank of Japan policy maker, said on Nov. 22 that companies ``are extremely cautious about raising prices'' because Japanese consumers have built up a ``strong resistance'' to increases after years of deflation.

Aeon Co., Japan's second-biggest retailer, lowered prices of food including yogurt and soy sauce today by as much as 25 percent to lure shoppers.

Crude oil touched a record $99.29 a barrel last week. Japan's regular gasoline prices averaged 150.2 yen a liter ($5.25 a gallon), the highest since the Tokyo-based Oil Information Center began collecting the data in 1987.

Gasoline Tax

A possible end to a higher gasoline tax may put a new drag on core prices. For more than 30 years the government has extended a law allowing it to double the tax on gas. The current law imposes a 53.8 yen levy per liter and expires in March. The opposition Democratic Party of Japan, which won control of the upper house in July, is against renewing it.

``Whether to extend the law will have a big influence not only on the government's tax revenue but also on consumer price moves,'' RBS's Yamazaki said. He said failing to extend the law could push down the consumer price index by 0.4 percentage point.

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

Last Updated: November 29, 2007 21:59 EST