Initial signs of inflation moderation

ISRAEL - In Brief 16 Apr 2023 by Jonathan Katz

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Inflation in March points to some initial inflation moderation Inflation in March was up 0.4% (below market expectations of 0.5%). Core inflation remained stable at 5.1% y/y, similar to the pace in January and February. Several categories moderated, such as housing rentals (from 6.8% y/y to 6.7%), non-housing services (from 5.7% to 5.4%) and non-food industrial goods (from 1.7% to 1.5%), while processed food prices accelerated (from 4.8% to 5.3%). Looking ahead, most macro trends support further inflation moderation (slowing growth and wage demand, moderating housing prices). The jocker in the pack remains the possibility of further shekel weakness if the judicial legislation pushes forward without a broad compromise. Tax revenues decline sharply from a high base The fiscal deficit in March reached 2.7bn ILS as tax revenues declined by 9.6% y/y in real terms. Since the beginning of the year, tax revenues are down 8.8% y/y (from a high base in 2022) which non-Covid expenditures are up 6.5% (nominal growth). Tax revenues from the real-estate sector are down in March by 43% y/y. We maintain our fiscal deficit forecast of 3.5% GDP, above the 1% target. Politics: Negotiations regarding the judicial overhaul continue between the coalition and the opposition brokered by the President. Large demonstrations continue as well. Netanyahu has taken some measures to cool the situation down; restricting his son’s political involvement (and tweets) and forbidding Jews to enter the Temple Mount until the end of the Ramadan, in order to cool the geo-political tension. FX: Moody’s altered Israel’s rating outlook from positive to stable (A1) due to the government’s handling of the judicia...