April's CPI surprises on the upside

ISRAEL - In Brief 15 May 2020 by Jonathan Katz

---

April's CPI declined by 0.3% m/m compared to market expectations (and our own) of -0.5%. Inflation y/y declined to -0.6% from zero in March. The main surprise for us came from the housing (rental) item which declined by -0.2% m/m (we had expected -0.7%).Somewhat surprisingly, rental contract renewals in April reflected a price increase of 2.3% y/y (similar to the increase last month), despite the sharp economic downturn from Covid-19. We suppose that there is a longer lag time than we had estimated in the CPI measurement of rental prices in reflecting the sharp contraction in purchasing power (high unemployment and pressure for lower wages) as well as the increase in long-term rental supply with Airbnb flats shifting to local demand. Other CPI items came in as expected, as petrol prices declined by 17% shaving off 0.5% from April's CPI. Both processed food (0.7% m/m) and fresh produce (4.8%) moved higher on strong demand from consumers during the shutdown. Core inflation moderated to 0.2% y/y from 0.35% last month. The PPI excluding energy declined by 0.3% m/m and by 0.8% y/y (moderating from -0.7% last month). Housing purchase prices (a separate survey not factored into the CPI) reflected higher prices by 0.6% m/m and 4.2% y/y, but we note that the latest survey reflects housing transactions in February-March on average (more or less pre-Covid-19 crisis). We will present our detailed inflation forecast for the coming year in our upcoming Weekly Macro Wrap Up. Clearly, the demand shock will be the dominant factor suppressing inflation, partially offset by higher energy prices.