Inflation surprises on the upside

ISRAEL - In Brief 15 Feb 2021 by Jonathan Katz

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Inflation in January reached -0.1% m/m compared to market expectations of -0.3% m/m. Annual inflation reached -0.4% y/y up from -0.7% in December. Core inflation (the CPI excluding energy and fresh produce) was flat (0.0% y/y), up from -0.4% y/y last month. January’s inflation surprises were mostly in the housing rental item. Housing rental equivalents (17.3% of the consumer basket) rebounded to 1.2% y/y from 0.2% last month (1.1% two months ago). This is a rather volatile item in the CPI, and December’s low print appears to be a quirk. With no erosion in consumer’s disposable income (including government support) and low inventory, a modest increase in housing rentals is reasonable. In addition, prices of housing appliances surprised on the upside, apparently an adjustment to higher global shipping costs. The PPI (excluding energy) reached -1.0% y/y from -1.4% last month, and industrial price inflation in the CPI reached -1.1% y/y following -1.8% in December. In short, we are seeing modest inflationary pressure in both housing rentals and some industrial items. Assuming higher commodity prices and gradually higher housing prices (as the economy opens up), our inflation forecast for the next 12 months currently stands at 0.9%, still not in any range to justify a shift in monetary policy.