TOKYO Japanese household spending suffered its biggest drop in nearly 2-1/2 years squeezed by rising prices, although volatility in some items meant the outlook might not be as gloomy as the headline figures suggested.

Japan's economy grew much faster than expected in the second quarter, helped by the end of COVID-19 curbs and a resurgence in inbound tourism, and analysts expect private consumption to support overall growth amid weakness in global demand.

The household spending fell 5.0% in July from a year earlier, official data showed on Tuesday, sliding for five consecutive months and more than the median market forecast for a 2.5% decline.

On a seasonally adjusted month-on-month basis, household spending was down 2.7%, versus an estimated 0.5% gain.

Spending on dining out, transportation, culture and entertainment services increased with an uptick of the number of people who went out, but there were declines in a wide range of areas such as food and housing, an official at the Ministry of Internal Affairs and Communications said.

"The impact of price hikes has been felt to some extent," the official said, though he noted that the 5.0% drop included items that fluctuate widely such as housing and automobile purchase.

Japan's core consumer price index, which includes oil products but excludes volatile fresh food prices, rose 3.1% in August followed by a 3.3% increase the previous month. It held above the Bank Of Japan's 2% inflation target for the 16th straight month.

On the whole, private consumption will continue to recover as economic activity normalises and the decline in real wages is expected to narrow, said Masato Koike, economist at Sompo Institute Plus.

"Rising wages and the normalization of economic activity will lead to a recovery in consumption," Koike said.

That view was supported by a private survey showing Japan's service sector activity expanded at its quickest pace in three months in August, underpinned by robust consumer spending as inbound tourism regained momentum.

To view the data on the website of the Ministry of Internal Affairs and Communications, click here:

(Reporting by Satoshi Sugiyama; Editing by Jacqueline Wong and Shri Navaratnam)