July’s CPI came in slightly above expectations

ISRAEL - In Brief 14 Aug 2020 by Jonathan Katz

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July’s CPI reached 0.2% m/m (-0.6% y/y, following -1.1% in June), slightly above expectations of 0.1% m/m. There were no real inflation surprises in July. Petrol prices increased by 4.3%. Domestic vacation costs increased seasonally by 5.8%, while apparel prices declined by 5.9%. Housing rental (equivalent) prices (17.2 % of the basket) continued to moderate to 1.4% y/y from 1.7% last month and 2.0% two months ago. Core inflation (the CPI excluding energy and fresh produce) inched slightly higher to -0.37% y/y from -0.48% last month. The PPI excluding fuel reached -1.8% y/y (from -2.3% last month). The bottom line: the inflationary environment remains quite low and actually negative (looking at core and PPI), in part due to a strong shekel. Inflation is expected to remain low as housing rental prices should continue to move lower y/y, in light of the deep economic crisis and lack of incoming tourists pushing short-time rentals to foreigners towards long term rentals to Israelis. Monetary policy will continue to be accommodative, although we do not expect rates to move lower below 0.1%, some form of yield curve target could be the next tool being considered. Housing purchase prices (a separate survey not factored into the CPI) actually ticked slightly higher by 0.4% m/m (up 1.9% y/y), following a -0.9 % decline in the previous two months, although monthly data is often revised. New home sales were up 22% m/m in June following the lockdown.