Core inflation accelerates on higher housing rental prices

ISRAEL - In Brief 15 Jul 2024 by Jonathan Katz

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No inflation surprises this time June’s CPI print (0.1% m/m, 2.9% y/y) came in according to market expectations (and ours as well). There were no significant surprises, although we note the acceleration of housing rental prices (OER) to 2.6% y/y from 1.9% y/y last month. This follows a downward trend since May of last year (from 7.6% y/y). We have been expecting a pick up in housing rental prices due to the supply/demand dynamics: Evacuees are moving out of hotels and into longer term apartment rentals while housing completions have declined due to the lack of workers in construction. The housing component in the CPI makes up 26% of the CPI. Core inflation accelerated to 2.5% y/y (from 2.2%) due to higher rental prices. Non-housing services increased in June by 3.2% y/y (as in May) and core goods increased by 1.3% (similar to May as well). A reform in private medical insurance fees pushed health insurance costs down 0.9% m/m. The PPI (excluding fuel) was up 1.2% y/y (similar to last month). Housing purchase prices (a separate survey not factored into the CPI) increased by 0.8% m/m and by 5.3% YTD; which could be an indirect factor supporting higher rental prices as well. Implications for monetary policy: The MPC has made it clear that monetary policy will be determined by the level of geopolitical risks and the behavior of the shekel. We note that the latest BoI macro forecast assumed an intense level of warfare until the end of the year and therefore assumed only one rate cut by Q225. Since then, the shekel has appreciated by 2.1% (against the basket) on renewed optimism regarding a possible cease-fire, and the Israel risk premium (looking at long-term bond differenti...