TOKYO--Japan's consumer inflation picked up last month as the energy shock caused by the Middle East conflict rippled out across goods, firming expectations that the next interest-rate hike is around the corner.

Excluding fresh food, consumer prices climbed 1.8% in July from a year earlier, compared with June's 1.6% increase, government data showed Friday. That was in line with the consensus forecast of economists polled by data provider Quick.

As inflation gathers pace and yen weakness persists, markets have become increasingly convinced that the Bank of Japan is preparing to tighten policy settings at its next meeting.

While government measures have softened the hit from surging oil costs, policymakers expect higher energy prices to start filtering through to a wider array of consumer goods over the summer.

Friday's data showed that the surge in energy costs following the outbreak of war in the Middle East has started to take hold, said Ryosuke Katagi, an economist at Mizuho Securities. Electricity and city gas bills are creeping higher, while prices for many food items and household goods have accelerated, he said.

"The results suggest that the impact of tensions in Iran is starting to gradually spill over into [Japan's] consumer prices," Katagi added, expecting domestic inflation to pick up through the second quarter of next year.

In July, energy prices increased 0.6% year-over-year, compared with June's 0.4% fall.

The yen's continued weakness remains another threat to the nation's inflation outlook.

Following joint intervention by the U.S. and Japan to support the yen, markets have rapidly priced in a higher chance of a BOJ rate increase in September.

Managing the yen's value isn't part of the BOJ's mandate, but Gov. Kazuo Ueda has stressed that it is one of the most important factors affecting price trends.

In an interview with local media after Japan and the U.S. conducted joint intervention to support the yen, U.S. Treasury Secretary Scott Bessent also pointed to currency weakness and energy costs as key drivers of inflation in Japan.

Against that backdrop, markets are pricing in an 80% chance that the BOJ will hike next month.

For Krishna Bhimavarapu at State Street Investment Management, evidence that inflation is increasingly being supported by domestic demand as well adds to the case for continued monetary policy normalization.

With underlying price pressures intensifying, Capital Economics is growing more confident that the BOJ will hike again, said economist Abhijit Surya.

"Looking further ahead, we think it will eventually raise rates to a peak of 2% by end-2027," he said.