the year - on - year rate of increase in the cpi is likely to be about 0 percent during this summer. but thereafter it is projected to increase at an accelerated pace and reach around 2 percent – the price stability target – around the first half of fiscal 2016. some may wonder how the rate of increase in the cpi can really reach 2 percent around the first half of fiscal 2016, given that the current level is about 0 percent. in response to this question, it may help you understand if we decompose the changes in consumer prices into two parts : the contribution of energy prices and the underlying trend in inflation. first, i will describe the contribution of energy prices. crude oil prices were over 100 dollars per barrel up until mid - 2014 but then declined substantially, temporarily falling to about 40 dollars per barrel, which accounts for the decline in prices of more than 60 percent. the decline in crude oil prices will lead to pushing down various energy prices, including gasoline and electricity charges, with some time lag. the negative contribution to the cpi will be largest this summer, pushing down the year - on - year rate of increase in the cpi by about 1 percentage point. in other words, if crude oil prices had not declined, the year - on - year rate of increase in the cpi this summer would be higher by about 1 percentage point than what is observed. furthermore, unless crude oil prices continue to decline, the negative contribution to the year - on - year rate of increase in the cpi will eventually dissipate. although it is difficult to precisely forecast future crude oil prices, if we assume that they will rise very moderately from the current level – and there are many who predict such a rise, as prices in the futures markets suggest – the negative contribution is expected to dissipate gradually from the second half of fiscal 2015 and be around 0 percentage point in the first half of fiscal 2016. in other words, as the negative contribution of energy prices dissipates, this alone will push up the year - on - year rate of increase in the cpi for the first half of next fiscal year by about 1 percentage point, compared with that for this summer. in addition to these changes, the underlying trend in inflation is expected to improve further. the underlying trend in inflation is determined by the output gap of the economy as a whole and by inflation expectations. first, when it comes to the output gap, this was about minus 2 percent just before the introduction of qqe, but

expected growth rates ( chart 9 ). with firms having come to take a positive view of their business conditions, a virtuous cycle from profits to fixed investment is starting to operate, where they aim to achieve higher profitability by raising the prices of their goods and services. i believe that the higher margins earned by firms through price rises could lead to wage increases and are expected to serve as a great catalyst for achieving the 2 percent price stability target. now i would like to reassess the two factors just mentioned based on recent developments. let me focus on the first factor - - firms'price - setting behavior. as the surge in raw material prices was much larger than expected, many firms in the dining - out and food manufacturing industries are passing on such cost increases to retail prices. similar moves are increasingly seen in other industries, such as apparel. looking at developments in the di for firms'output prices in the bank's latest march 2022 tankan to examine their price - setting stance, the di has reached the highest level since 1980 ( i. e., just after the second oil shock ) for the manufacturing industry and the highest level since 1991 ( i. e., the end of the bubble period ) for the nonmanufacturing industry ( chart 10 ). these moves to raise selling prices are mainly due to cost - push factors stemming from the surge in raw material prices. however, such a pass - through of cost increases was barely seen when a similar price hike in raw materials occurred in past deflationary periods, like the one from 2007 to 2008. this may suggest that many firms are trying to change their " low - margin, high - turnover " business models that were quite common in those days. on the other hand, regarding the second factor for inflation - - that is, firms'growth expectations - - many firms unfortunately do not seem to have raised their expectations yet, partly due to the global supply - side constraints that i pointed out earlier. this is suggested by the fiscal 2021 annual survey of corporate behavior released by the cabinet office, which shows that firms'forecast for the real economic growth rate over the next five years was 1. 0 percent, thus remaining only close to the 1. 1 percent presented in the fiscal 2020 survey. firms'growth expectations are key to the sustainability of wage increases in japan. although the proportion of firms that have adopted so - called simultaneous recruiting of new graduates and seniority - based wages has started to decrease recently,