Inflation surprises sharply on the downside in May

ISRAEL - In Brief 15 Jun 2020 by Jonathan Katz

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The CPI in May declined by 0.3% m/m and fell to -1.6 y/y (from -0.6% in April). The market was expecting a positive index of 0.1% m/m. Core inflation (excluding energy and fresh produce) declined by 0.5% y/y (yes, negative) from +0.2% last month. The items which surprised on the downside include food prices which declined 0.9% m/m (following an increase of 2.2% in the previous three months), and more significantly: clothing prices which increased by only 0.3%, and not by the usual 7% seasonality of summer fashion prices. Clothing prices are currently down 10.5% y/y (from -3.8% in April)! Furniture and housing appliances also declined by 0.5% m/m (and by 1.9% y/y). These two items were strongly impacted by the collapse in household demand due to the Covid-19 crisis. Housing (rental equivalents) prices moderated modestly y/y to 2.0% from 2.3% last month, a trend which is likely to continue in coming months. Clearly, this downside inflation surprise is the result of the crisis and with unemployment expected to remain relatively high (9% by end-year) and some firms reducing wages, the erosion in disposable income will continue to support low inflation.Despite negative inflation y/y, in our opinion, the MPC (and Governor) are not seriously considering lowering rates to zero or negative territory, but rather will continue to intervene in the FX and government bond markets.