Inflation in October points to deceleration

ISRAEL - In Brief 15 Nov 2023 by Jonathan Katz

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Inflation in October points to deceleration Inflation in October (0.5% m/m, 3.7% y/y following 3.8% in September) came in as expected. The underlying trends point to deceleration with housing rental prices (OER) decelerating to 4.9% y/y from 5.5%, while the main housing item moderated to 4.8% y/y from 5.8%. Non-housing services decelerated to 4.3% y/y from 4.8% while core goods increased slightly to 0.5% y/y from 0.1%. Core inflation (CPI excluding energy and fresh produce) declined to 3.46% y/y from 3.58%. The sharp depreciation of the shekel in October on the back of the breakout in hostilities was felt in “travel abroad” item which increased by 2.2% (instead of the usual seasonal decline). The PPI excluding fuel increased by 2.3% y/y from 1.7% last month. The housing purchase survey (not factored into the CPI) continues its downward trend, declined by 0.2% y/y from +0.9% y/y in September. Since May, home prices have declined by 3.5% in annual terms. Implications for monetary policy: Recently, the MPC has stressed the importance of shekel stability and avoided reducing rates in the last rate decision. This was when the shekel was above 4.0/USD; since then, it has appreciated significantly toward 3.78 ILS. The macro story certainty supports monetary loosening in light of softer inflation and weakening growth, as well as the general global backdrop of lower inflation. Assuming the shekel continues to appreciate toward 3.70/USD a rate cut on November 27th certainly cannot be ruled out. Further shekel volatility and weakening towards above 3.80 will support the MPC hawk's preference for shekel stability who currently are focused on financial stability.