Isranomics

Amidst conflict, positive turn in Israel’s Economy: inflation decline offers hope

by | Oct 15, 2023 | Economy | 0 comments

In September 2023, Israel’s Consumer Price Index (CPI) exhibited a notable decrease of 0.1% compared to the previous month. This downturn has had a significant impact on the overall annual inflation rate, which fell to 3.8% from the 4.1% recorded at the end of August.

The September CPI reading stands in stark contrast to earlier projections, which had estimated a 0.2% increase. The unexpected decline in inflation rates has fueled speculation about the Bank of Israel’s upcoming interest rate decision, due at the end of October. There are two primary factors influencing this speculation: the deceleration of inflation and the war with Hamas.

A closer look at the CPI data reveals that the index, when excluding energy and fruits and vegetables, increased by 3.7%. However, the exact causes behind the overall decrease in inflation require further analysis, and the Central Bureau of Statistics initially highlighted certain key areas in the economy where price drops were observed. Notably, the transportation section experienced a 1.5% price decrease, while the food, culture, and entertainment sectors each saw a decrease of around half a percent. Conversely, fresh fruits and vegetables experienced a significant increase of 4.3%, though it’s essential to note that this sector is highly volatile. Education services also saw a notable 1.3% increase, while more moderate increases of half a percent were observed in rent, furniture and home equipment, clothing and footwear, and health.

In light of these economic developments and the recent conflict, some economists are suggesting that the governor of the Bank of Israel may consider lowering the interest rate. Economist Yonatan Katz of Leader Capital Markets has stated, “The sharp drop in the rate of inflation in September reinforces our assessment that a sharp interest rate cut is expected soon, at a rate of at least 0.5%, perhaps even before the upcoming interest rate decision. This move will likely ease pressure on both the business sector and households.

Nonetheless, another factor that could contribute to the return of inflation is the depreciation of the shekel. However, it is too early to tell at this point because the Bank of Israel will continue to sell foreign money in order to prevent this scenario from unfolding.

In addition to these developments, the governor of the Bank of Israel addressed inflation expectations in a speech to the G30 forum, noting that “inflation expectations have not changed significantly since the fighting, it is too early to say how this will affect inflation in the immediate term, but in the medium term, it is reasonable to expect a certain slowdown.

Simultaneously, the housing market in Israel continues to show signs of stagnation. The most recent apartment price index, released by the Central Bureau of Statistics, indicates a continued downward trend.

While the months of July and August typically witness a slowdown in the real estate industry, the annual comparison is more telling. When compared to the same period in 2022, the annual housing price index has increased by a modest 0.8%. By district, Haifa (4.2%), the North (3.7%), Jerusalem (1.2%), the South (0.9%), Tel Aviv (0.8%), and the Center (1.6%) have experienced varying levels of annual price increases, with the annual new apartment price index recording a 2.1% decrease.

In conclusion, the latest CPI reading in Israel, with its unexpected decrease in inflation, has triggered discussions about future economic policies and the possible impact of the current security situation. The speculation about interest rate cuts and the ongoing housing market stagnation emphasize the uncertainty in Israel’s economic landscape, leaving both policymakers and the public with much to consider.

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