Inflation surprises again on the downside, supporting rate stability in September

ISRAEL - In Brief 15 Aug 2023 by Jonathan Katz

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Inflation surprises again on the downside Inflation in July increased by 0.3% m/m (expectations were for 0.3% to 0.5%, we were at the high end), and moderated to 3.3% y/y from 4.2% (due to strong base effect). Core inflation moderated as well to 3.6% y/y from 4.5%. All major categories reflect moderation, mostly core goods which actually declined by 1.3% y/y (yes, price decline), from +1.4% last month due to a sharp decline in apparel prices of 9% and a 4.1% decline in furniture and home appliances. Used cars declined by 1.1% m/m in July and by 3.9% YTD. Housing rental prices (OER) moderated to 6.2% from 6.7% last month, and non-housing service prices moderated to 4.8% from 5.5% (especially travel abroad prices). The PPI (excluding fuel) declined by 0.1% and moderated to 0.7% y/y from 0.8%. Housing purchase prices (a separate survey not factored into the CPI) declined by -0.8% in the last three monthly surveys (temporary surveys), and moderated to 5.2% in July from 7.6% last month. Implications for monetary policy: Despite the recent pressure for shekel depreciation, July’s CPI will clearly support rate stability on September 4th. The subsequent rate decision on October 20th, will be after inflation accelerates to 4% (our forecast), assuming two monthly CPI prints of 0.3% in August and September, which could renew the possibility of a rate hike depending on the direction of the shekel; which has become a rather important factor in monetary policy.