Despite CPI rise by 0.3%, the future of Israel’s inflation is uncertain

The Consumer Price Index (CPI) for July 2023 experienced a modest increase of 0.3%, according to the most recent data from the Central Bureau of Statistics (CBS). Over the past year, the index has seen a notable surge of 3.3%.

Although not a part of the CPI, housing prices also revealed interesting dynamics, with a slight 0.2% decline in the most recent survey, while still maintaining a 5.2% increase from the previous year. Notably, the cost of new apartments decreased by 0.6% this month, with a cumulative drop of 2.4% over the past nine months; according to analysis from Bank Hapoalim, the data suggests a potential continuation of this downward trend in apartment prices.

Bank Hapoalim also noted that, looking forward to the CPI’s trajectory, the recent minor uptick aligns well with predictions and projections. The annual inflation rate has decreased to 3.3%, likely influenced by the exceptionally high figures from July in the prior year. As such, the annual inflation rate will likely begin to climb as well, now that July 2022 is out of the scope of measurement.

Interestingly, there have been price reductions in categories such as furniture, home equipment, clothing, and footwear. Conversely, services, particularly rental costs, continue to climb, albeit at a more tempered pace.

“These trends are now being observed all over the world – inflation originating from the prices of services, which are more affected by global wage increases, while the prices of industrial products are falling, partly due to the moderation of economic activity, and probably also to a change in consumer preferences,” stated Bank Hapoalim.

What will impact Israel's future inflation rate?

Inflation in the coming year will be molded by conflicting factors. While a potential slowdown in economic activity and a moderation in rental costs are expected, the notable increase in average wages throughout the past year, and the recent devaluation of the shekel’s exchange rate are projected to have serious repercussions on the inflation rate.

Given these factors, Bank Hapoalim suggested that the Bank of Israel remain cautious about its approach to inflation. “We are far from the point where the Bank of Israel can feel comfortable with inflation,” it said, noting that if the exchange rate manages to stabilize at its current level, “we assume that the Bank of Israel interest rate will remain unchanged until the middle of 2024.”

IN RESPONSE to the recently published price index, Dubi Amitai, chairman of the Presidium of the Israeli Business Sector, emphasized the significance of interpreting the economic data in light of the current challenges facing businesses.

“The index published today by the CBS reflects a decrease in the rate of inflation, which is a good thing, but it also reflects the slowdown in the economy and the decrease in demand,” he said. “This is the result of two things: the high interest rate mechanism that has been working for about six months and makes credit more expensive; and a high level of uncertainty, and from it, a slowdown in economic activity.”

Amitai cited two primary factors influencing the challenging economic conditions within the business sector. Firstly, the high uncertainty stemming from Israel’s political situation has contributed significantly. Simultaneously, a substantial rise in financing costs due to sharp interest rate increases aimed at tackling inflation has led to reduced investments, a decline in raw material imports, and a slowdown in the business sector. This situation is further exacerbated by a worrisome surge in credit volumes.

“The time has come to return to the discourse on the government’s responsibility for two things,” Amitai concluded. “Restoring confidence and reigniting the economy’s growth engines.”