Isranomics

Unexpected Inflation Slowdown: May CPI Surprises with Modest Rise of 0.2%

by | Jun 14, 2024 | Economy | 0 comments

In a surprising turn of events, the Consumer Price Index (CPI) for May exhibited a modest increase of 0.2% on a monthly basis, defying earlier forecasts which had anticipated a rise of 0.5%-0.6%. Over the past year, the CPI climbed by 2.8%, mirroring the previous month’s figures and staying below the economists’ predictions of a 3.1%-3.2% increase, which would have breached the upper limit of the Bank of Israel’s price stability target.

Key Price Movements

Several sectors experienced notable price changes in May. Fresh fruits saw a significant price surge of 10.3%, while clothing and footwear prices increased by 2.2%. The costs of food, as well as culture and entertainment, each rose by 1%. Miscellaneous items increased by 0.5%, and housing along with furniture and home equipment saw a 0.4% rise. Conversely, fresh vegetables and transportation costs decreased by 2.4% and 1.7%, respectively.

Apartment Prices on the Rise

The Central Bureau of Statistics also reported a continued rise in apartment prices, which are not included in the CPI. Comparing transaction prices from March-April 2024 to February-March 2024, apartment prices increased by 0.9%. Regionally, Haifa led with a 1.6% increase, followed by Tel Aviv at 1.1%, and other areas showing moderate rises.

On an annual basis, from March-April 2023 to March-April 2024, apartment prices grew by 2.1%. Haifa again topped the list with a 6.6% annual increase. Meanwhile, the annual price index for new apartments slightly decreased by 0.3%.

Cautious Optimism Amid Inflation Forecasts

Despite the encouraging CPI figures, leading economists urge caution. A surprising decrease in the cost of trips abroad, which fell by 7.4%, was a key factor in the unexpected CPI moderation. This resulted in a mere 0.2% rise in the general index and no change in the core index, bringing annual core inflation down from 2.4% to 2.2%.

Matan Shatrit, the chief economist at the Phoenix Group, elaborates that the broader trend still suggests rising inflation. According to Shatrit the most key index items showed monthly increases, except for transportation and communication, primarily due to reduced flight prices. Looking ahead, therefore, there is a good chance that annual inflation will hover near the upper limit of the central bank’s target, potentially peaking in January 2025, partly due to an expected VAT increase.

Implications for Interest Rates

Regarding the impact on the Bank of Israel’s monetary policy, experts believe that despite the unexpected CPI data, the central bank is likely to maintain the interest rate at 4.50% in its July decision. The reason being is that given the persistent inflationary pressures and significant uncertainty, the policy makers will be cautious about reducing the interest rate in the near term.

In summary, while the latest CPI figures offer a brief respite from rising inflation concerns, experts warn that underlying inflationary trends and economic uncertainties remain significant challenges for Israel’s economy.

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