Israel’s June CPI: Are Bank of Israel’s counter-inflation measures paying off?

Israel's Consumer Price Index (CPI) for June delivered a surprising outcome as it remained unchanged, contrary to the expected rise of 0.2%-0.3%. CPI is commonly used as an indicator of inflation, and this development reinforces the notion that recent efforts by the Bank of Israel to ease the country’s inflation are paying off, at least for now.

The decrease in the annual inflation rate from 4.5% to 4.2% suggests a slight easing of price pressures. There were significant decreases in prices of fresh fruit and vegetables (a 4.6% decline), clothing and footwear (3%), and furniture and household equipment (0.8%) signaling potential weak consumer demand in these areas.

Not everything is on the decline, however, as notable increases were observed in food (a 0.6% rise), healthcare (0.4%), and education, culture, and entertainment (0.2%). These upward price pressures in essential sectors will likely continue to contribute to the overall inflationary environment.

As well, a rise in residential rents by 0.5% could be a concerning development, particularly for individuals or households reliant on rental accommodation. Higher rents can impact disposable incomes and hinder overall affordability, potentially affecting consumer spending and economic stability.

Analyzing the housing market, the decline in home prices for both new and secondhand homes during April-May 2023 suggests a cooling in the housing sector. A regional breakdown indicates mixed performance, with Jerusalem experiencing price increases, while Tel Aviv, the center, and the South witnessed declines.

Is inflation in Israel cooling off?

Last week, the Bank of Israel decided not to raise its key interest rate (now resting at 4.75%) for the month of July, stating that inflation appears to be moderating in response to the series of consecutive interest rate increases that the bank enacted in the previous months.

Bank of Israel Governor Amir Yaron stated that the current interest rate is sufficiently restraining and supports the decrease of inflation to its target. However, he emphasized that the decision does not rule out the possibility of future rate increases if inflation doesn't moderate as expected.

"Several indicators can be seen that point to the beginning of a moderating trend," said Yaron. "The rate of work vacancies is decreasing, the volume of mortgages has been decreasing in recent months, and the volume of credit for small and medium businesses has stabilized. All of these imply the beginning of a trend of restraining the economy, which results from the interest policy, which works to reduce inflation."

The bank's macroeconomic forecast predicts an annual inflation rate of around 3% by Q2 2024 and 2.4% by the end of that year.

Yaron noted that politically-instigated instability and the devaluation of the shekel pose a threat to inflation moderation, and further monetary policy restrictions may be necessary if these trends continue.

"The main risk to the forecast is the realization of a scenario in which legal and institutional changes will be accompanied by an increase in the state's risk premium, continued devaluation of the shekel, damage to exports, and a decrease in local investments and demand for private consumption," said Yaron. "It is important to restore stability and certainty to the Israeli economy, and to make sure that legislative changes are carried out with broad agreement, and that the strength and independence of the institutions will be preserved."