​Despite slight inflation surprise, core inflation moderates

ISRAEL - In Brief 14 Apr 2021 by Jonathan Katz

---

Inflation in March was up 0.6% m/m and 0.2% y/y (from zero last month), slightly higher than market expectation (and ours) of 0.5% m/m. A closer look at the details actually points to a moderation of underlying inflation, with core inflation (the CPI excluding energy and fresh produce) declining to 0.21% y/y from 0.29% last month, as prices of housing rental equivalents (17.3% of the basket) moderated to 1.0% y/y from 1.5%. This item surprised on the upside in January-February, and therefore this reversal is encouraging, although we expect some acceleration going forward as the economy rebounds. The main item that surprised on the upside in March was clothing prices (up 4.6% m/m, we had expected 2.2%), but this is a very volatile and seasonal item, and a strong print in March will most likely mean less price pressure in the coming months. We note that two items increased sharply: domestic vacations (9.7% m/m) and events and parties (3.7%), the two areas where “pent-up demand” was clearly pronounced (and expected). On the other hand, electrical home appliances declined by 0.1% m/m, following price pressure in January-February due to higher commodity and shipping costs. Housing purchase prices (a separate survey not factored into the CPI) softened slightly, up 4.0% y/y from 4.2% last month. Implications: The inflationary environment in Israel has accelerated slightly this year but remains low relative to most DM. We expect inflation in the next 12 months to reach 0.9%-1.0%, at the low end of the inflation target (after peaking at 1.4% y/y in May 2021 due to the base effect). With the economy rebounding rapidly, we expect the Bank of Israel to taper both FX and FI interve...