Inflation surprises sharply on the downside, but is expected to accelerate going forward

ISRAEL - In Brief 16 Jun 2024 by Jonathan Katz

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Geopolitics: Israel continues its offensive in Rafah and missiles/drones continue to penetrate Israel from Hezbollah in the North, at generally a more intense level. Gantz announced his resignation from the government last Sunday. There appears to be little progress in reaching a cease-fire with Hamas and the war drags on, with talk of an imminent escalation (infantry included) in the North. This has weighed on the shekel. Inflation surprises on the downside May’s CPI was up only 0.2% m/m, compared to market expectations of 0.6%. Headline inflation held steady at 2.8% y/y. Core inflation moderated to 2.2% y/y from 2.4%. Flights abroad (2.4% of the basket in May) fell sharply by 14.7%, which was totally unexpected. Flights abroad are down 9% y/y in dollar terms. In light of the decline of carriers and the spike in flight costs since the war broke out, this measurement will most likely be corrected in part upwards in coming months. We see inflation reaching 3.1% in the next 12 months, due to a fiscal expansionary policy, tight labor market, higher taxes, problematic housing dynamics and supply disruptions. Demand for housing increases, as do prices Total home sales are up 30% y/y in April, especially new homes. Mortgages in May reached 7.8bn NIS, up 19% y/y. Housing prices are up 0.9% in the last survey and by 4.5% YTD. Apparently, households are concerned that the lack of construction activity (due to the lack of Palestinian workers) will push prices higher. Imports rebound in May Merchandise imports have trended higher in recent months, especially consumer goods but raw materials and machinery as well. Expansion of imports is a positive leading indicator of growth, and...