Isranomics

Israel’s latest inflation reading shows unexpected drop in July 2023

by | Aug 16, 2023 | Economy | 0 comments

Israel’s latest inflation figures have taken both analysts and the market by surprise. The Central Bureau of Statistics announced on Tuesday that the Consumer Price Index (CPI) rose by a modest 0.3% in July 2023. Over the past twelve months, the index has increased by 3.3%, a noticeable drop from the 4.2% recorded prior to the current release.

Economists had been projecting a slightly higher increase of 0.4% to 0.5% for July, and the unexpected outcome has stirred conversations about the potential implications for the nation’s economy. This reading marks the lowest inflation rate Israel has seen since January 2022. Notably, this is also the third consecutive month of decreasing CPI at an annual rate, having peaked at 5.4% at the start of the year.

Chen Herzog, the Chief Economist at BDO, cautiously commented on the numbers, stating that while the current drop in inflation is encouraging, it might not be sustainable. Herzog pointed out that the inflation rate had temporarily dropped to 3.3%, but he anticipated a return to around 4% after the release of the August CPI figures. He emphasized that the data provided does not account for recent changes in the exchange rate of the dollar, nor does it reflect the surge in oil and commodity prices worldwide in the last two weeks.

This sentiment was echoed by Victor Behar, the Director of the Economic Department at Bank Hapoalim. Behar explained that the apparent decrease in annual inflation might be influenced by the removal of exceptionally high figures from the measurement. He also predicted a potential uptick in inflation over the coming months.

One interesting observation is the impact of rising rental prices for new tenants, which appears to be influenced by high interest rates. This trend could potentially drive inflation upward, as the costs get transferred to consumers. Furthermore, there is a distinct trend in the price fluctuations of various categories. While furniture, home equipment, and clothing prices have decreased, service prices, including rent, have continued to rise rapidly. This aligns with global trends where inflation is stemming from service sector price increases driven by wage growth, while industrial product prices are experiencing a decline due to economic moderation and shifting consumer preferences.

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

Uri Greenfeld, Psagot’s Chief Strategist, acknowledged the likelihood of higher inflation in the near future. He emphasized that despite this, the current July CPI figures signal positive news for Israel’s inflation environment. Greenfeld noted that when excluding housing costs, the last three months have shown a relatively close alignment with the Bank of Israel’s target inflation rate.

However, given that a significant proportion of the goods imported into Israel are denominated in dollars, the latest depreciation of the shekel might amplify the upward pressure on prices. Greenfeld pointed out that the ongoing weakening of the Israeli currency and the potential for increased inflation expectations could lead to another interest rate hike by the Bank of Israel. Nonetheless, he remained cautiously optimistic, suggesting that inflation could return to the central bank’s target even before the middle of next year, rendering another rate hike unnecessary from their perspective.

In light of these contrasting viewpoints, the focus now shifts to the upcoming interest rate decision scheduled for the beginning of September. The current interest rate stands at 4.75%, and according to the Bank of Israel’s macroeconomic forecast, there is room for a further increase of 0.25% to reach 5%. The trajectory of the CPI and the exchange rate in the coming months will likely play a significant role in determining the central bank’s decision.

As the nation’s economic stakeholders continue to analyze the latest inflation data, it is evident that the road ahead is filled with uncertainties. Israel’s economy will have to navigate the complex interplay of global economic trends, exchange rate fluctuations, and local inflation dynamics to ensure stability and growth in the months to come.

Main article photo: The Bank of Israel building Jerusalem. (REUTERS/Ronen Zvulun)

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