July CPI reading lower than expected

Israel’s Consumer Price Index (CPI) rose by 0.3% in July. In the twelve months to the end of July, the index rose by 3.3%. The figures released by the Central Bureau of Statistics came as a surprise, as analysts had been predicting a 0.4% rise in the CPI in July. The Bank of Israel’s target range for annual inflation is 1-3%.

There were notable rises in the fresh produce item, up 3.4% last month, in housing and transport, both up 0.7%, home maintenance, up 0.6%, and food, up 0.4%.

The clothing and footwear item fell by 4.8%, and furniture and home equipment fell 1.2%.

The rise in rents for new tenants continues to be a concern. The home rental item excluding public housing rose by only 0.5%, but for tenants renewing a lease the rise was 3.8%, and for new tenants the rise was 9%.

The Central Bureau of Statistics also released figures for home prices, which are not part of the CPI. A comparison of deal prices in May-June 2023 with deals in April-May 2023 shows a fall of 0.2%.

In comparison with May-June 2022, prices in May-June 2023 were 5.2% lower. In the breakdown by region, prices fell year-on-year by 8.9% in Haifa, 6.6% in Jerusalem, 5.2% in the south, 5.2% in the central region, and 2% in Tel Aviv.

Psagot chief economist Ori Greenfeld said, commenting on the CPI figures, “The fall in the twelve-month inflation rate to 3.3% is only temporary, because it mainly results from the fact that the CPI reading in July last year was particularly high.

“Nevertheless, and even though the annual inflation rate will return very close to 4% next month, there is no doubt that the July CPI reading is good news from the point of view of the inflation environment in Israel. Seasonally adjusted, the inflation rate over the past three months is very close to the target range, and that it is so high is mainly because of the housing item.

“Inflation excluding housing in the past three months was just 1.5% on an annual basis. Since home prices (which are not part of the CPI) continue to decline, it is likely that rents in Israel, which are used to measure the housing item, will start to slow in the coming months, and will contribute to a further fall in the inflation trend.

“We estimate that inflation will be back within the Bank of Israel’s target range even before the middle of next year. At the moment, from the Bank of Israel’s point of view, the inflation environment looks alright, and does not justify a further interest rate hike. All the same, the exchange rate continues to be the main risk factor in this respect. If the depreciation of the shekel continues, inflation expectations will rise again, and the Bank of Israel could raise its interest rate once more.”

Published by Globes, Israel business news – en.globes.co.il – on August 15, 2023.

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