Inflation acceleration supports front loading rate tightening

ISRAEL - In Brief 15 Jul 2022 by Jonathan Katz

---

June’s CPI in line with market expectations Inflation in June increased by 0.4% m/m (4.4% y/y, up from 4.1% last month), in line with market expectations, while we were expecting a slightly higher print of 0.5%. Inflation in June was impacted by an 8.6% hike in petrol prices, a 22.6% increase in domestic rental prices and especially: a 0.9% increase in owner equivalent rentals which pushed up the annual rate up to 4.1% y/y from 3.4% last month. Items which moderated the CPI include apparel (down by a seasonal 3.4% m/m), and fresh produce (down by 8.5%, seasonal as well as summer fruit supply surges). Somewhat surprising was the very modest 0.9% m/m increase in travel abroad cost (up only 5.9% y/y) although domestic vacation prices increased by 3.8% m/m (10.3% y/y). Food prices were up only 0.4% m/m (5.2% y/y, much lower than most DM). Food prices are expected to increase sharply in coming months. Housing purchase prices (a separate survey not factored into the CPI) continue to push higher, by 1.4% m/m in the last survey and by 15.9% y/y (up from 15.3% last month). Recent moderation in demand will support some deceleration in the pace of housing prices in coming months. Implications: Inflation is accelerating broadly, more in services than in goods. Core inflation accelerated to 4.1% y/y from 3.65% last month, and is way above target. With the Bank of Israel rather influenced by other central banks who are front loading, it is fair to expect a 0.5% hike on August 22 and 0.5% on Oct 3rd with rates reaching 2.75% in early 2023. Economic indicators point to fairly robust growth and a tight labor market.