Isranomics

Israel’s economy: inflation slows beyond forecasts while shekel gains strength

by | Jul 15, 2023 | Economy | 0 comments

The Consumer Price Index (CPI) for June 2023 remained unchanged, according to the latest announcement by the Central Bureau of Statistics, bringing year over year inflation down to 4.2% from 4.6% a month earlier. Due to initial forecasts predicting an increase of 0.2%-0.3% and a more moderate decline in annual inflation, this unexpected figure comes as a surprise.

Providing insight into the surprising decline, Modi Shafferer, Chief Financial Markets Strategist at Bank Hapoalim, highlights that the unexpected outcome can primarily be attributed to the housing segment of the economy. Contrary to expectations, this sector did not witness the anticipated increase of 0.6%. Despite the Central Bureau of Statistics reporting an acceleration in rental price increases for both renewing and new tenants, the housing category remained unchanged. Furthermore, a moderate increase in food prices (0.6%) and a notable decrease in fruits & vegetables (-4.6%), clothing & footwear prices (-3%), also played a role in the unexpected reading for June.

Israel’s central bank chief Amir Yaron (Reuters/Steven Scheer)

Ronan Menachem, Chief Economist at Bank Mizrahi Tefahot, emphasizes that the housing section, which predominantly reflects rental costs, remains at a notably high level. He argues that without relief in this sector, which constitutes 26% of the CPI index, achieving a further decrease in the inflation rate towards the target range of 1%-3% will be challenging for the Bank of Israel.

Dr. Gil Bafman, Chief Economist of Bank Leumi, estimates that inflation in Israel has likely reached its peak. Bafman provides a forecast for the remainder of the year, anticipating a price increase of approximately 3%-3.5% over the next 12 months. By the end of 2023, inflation is projected to range between 3.4% and 3.9%, with a return to the bank’s target range of 1%-3% expected in 2024.

Bafman further predicts that the Bank of Israel will maintain the current interest rate in the upcoming September decision and start decreasing it at the beginning of 2024. However, he emphasizes that this positive forecast hinges on the exchange rate remaining relatively stable. Presently, the dollar rate stands at approximately NIS 3.61, indicating an almost 3% drop in just one week.

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