​Another CPI surprises on the upside

ISRAEL - In Brief 15 Mar 2021 by Jonathan Katz

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Inflation in February reached 0.3% m/m and zero y/y (from -0.4% y/y last month), about 0.2% about market expectations (and our). Core inflation (inflation excluding energy and fresh produce) pushed higher, reaching 0.3% y/y from zero last month. The main inflation surprises came from prices of housing rental equivalents which accelerated to 1.5% y/y from 1.2% last month (and are expected to continue to move higher with economic recovery). In addition, clothing prices (which declined sharply in January by 9.7% m/m surprised on the upside. This item has been rather volatile due to all the closures (of malls) which disrupted the usual seasonality. Certain items such as home durables increased as well due to higher shipping costs, but this was expected. We note that inflation remains generally low, relative to most developed markets. We expect further acceleration due to the base effect of energy prices and some pent-up demand as restrictions are removed from restaurants, hotels, leisure and events. Our inflation forecast currently stands at 1.3% for 2021, still at the low end of the inflation target.With the economy recovering quickly and inflation entering the inflation target (we expect inflation in May 21 to reach 1.4% y/y), the Bank of Israel is likely to wind down its government bond purchases by the end of the summer.