Following several months of downward surprises, July corrects upwards

ISRAEL - In Brief 15 Aug 2022 by Jonathan Katz

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July’s CPI surprises sharply on the upside Inflation in July increased by 1.1% m/m and 5.2% y/y, up from 4.4% past month. Expectations were for an index of 0.6%-0.7% m/m; we were expecting 0.7%. Core inflation (the CPI excluding energy items and fresh produce) increased by 4.7% y/y (up from 4.1%). The items which surprised most include housing prices with OER prices up 1.1% m/m (4.7% y/y up from 4.1% last month and 3.4% two months ago); and flights abroad which increased by 22.9% m/m in July, following a rather moderate increase in the past two months, despite the surge in demand. Domestic vacation prices increased by 3% m/m. Food prices increased modestly (0.5% m/m, 5.5% y/y) but several basic food items are expected to increase in coming months. Vehicle prices increased by 0.7% m/m and by 11.1% y/y. So basically, inflation remains broad-based and more concentrated in services. Housing purchase prices (a separate survey not factored in the CPI) increased by 2% m/m and by 17.8% y/y, up from 16.1% last month. There is no sign of cooling price pressure despite lower household demand for housing. Implication for monetary policy: The MPC is expected to hesitate between a hike of 0.5% and 0.75%. Other factors also support tightening, including a tight labor market (unemployment at 3.4% in July), some wage pressure, and fairly decent growth as reflected in the CBS business survey. The last piece of the puzzle will be GDP growth in Q222, to be released on Tuesday the 16th. We expect growth of 3.9% saar, while consensus is closer to 2.5%. Bottom line: Our base case is for a 0.5% hike next week with rates stabilizing at 2.5% in early 2023.