Inflation way below target in 2019, but expected to rise this year

ISRAEL - In Brief 15 Jan 2020 by Jonathan Katz

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Inflation reached 0.0% m/m in December, coming in at the low end of expectations (0.0%-0.1%). Inflation y/y reached 0.6%, up from 0.3% last month. Core inflation (the CPI excluding energy and fresh produce) moved slightly higher to 0.64% y/y in December from 0.51% in November. Despite this low headline print, the devil is in the details. Housing rental prices (making up 17.5% of the CPI, the major category in the housing item) accelerated to 2.8% y/y from 1.9% last month and 1.6% two months ago). This is highest rate of increase since February of 2019. No less worrisome for the Bank of Israel is the acceleration in housing purchase prices (a separate housing survey, not factored into the CPI), up 1.1% cumulative in the past two months and up 3.4% y/y this month, from 2.7% last month. Strong housing demand was apparent in strong new home sales (up 27% y/y in November) and mortgage demand. Up until now, this has not been a major concern in for the MPC which officially maintains a loosening bias. We think lower rates are highly unlikely as long as economic growth remains steady, and the housing market increasingly frothy. Looking ahead, we note that the shekel appreciated by nearly 9% this year (against the basket of currencies), and clearly this was the main factor moderating inflation. Since the October, the Bank of Israel has returned to FX intervention (purchasing nearly 4.0bn USD in Q419) and has succeeded in stabilizing the shekel (so far). If shekel appreciation moderates (fundamentals still support a stronger shekel), and rental prices continue their present rapid pace, inflation is likely to be above 1% y/y this year (we expect 1.2%-1.3%), especially if we take i...