Inflation surprises on the upside as housing rental prices accelerate

ISRAEL - In Brief 15 Aug 2016 by Jonathan Katz

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Inflation in July surprised on the upside, reaching -0.6% y-o-y (we had expected -0.8%) and 0.4% m-o-m. Granted, this is a seasonally high CPI but the acceleration of housing prices (rental equivalents) to 2.4% y-o-y from 1.9% last month explains the higher inflation y-o-y. Although this is a volatile item in the CPI, we note that real wages are up 4% y-o-y (in May), employment growth is strong while housing starts have declined recently). The BOI preferred core inflation index is up 0.8% y-o-y (the CPI excluding energy and government initiated price cuts) from 0.6% last month. Although housing purchase prices (measured by a separate survey, not factored into the CPI) reveals some moderation (up 6.9% y-o-y from 8.0% last month), elevated demand for housing and this higher-than-expected CPI in July will obviously keep rates stable next month. In addition, increasingly expansionary fiscal policy is not supportive of more expansionary monetary policy. Despite this high inflation print, we still expect inflation to remain low through 2017 (0.6% NTM), as the ILS appreciates, and the cost of living declines as the MOF encourages competition (especially in the food market). This will keep inflation at bay despite higher wages on the back of a tight labor market.