May CPI surprised to the downside, but inflation remains near 3% – rate cut unlikely due to geopolitical risks

ISRAEL - In Brief 16 Jun 2025 by Sani Ziv

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May CPI surprises with a 0.3% drop, driven by a sharp fall in prices for trips abroad May CPI in Israel surprised to the downside, falling 0.3% month-on-month, driven primarily by a sharp 15.5% drop in overseas travel prices. This brought the annual inflation rate down to 3.1%, from 3.6% in April. The unexpected decline follows a 1.1% increase the previous month, leaving the two-month cumulative rise at 0.8%—broadly in line with earlier forecasts. Market expectations for May were unusually volatile, ranging from –0.2% to +0.4%, due to high uncertainty surrounding international travel costs. In the end, the steep drop in this volatile component reversed part of the 27.2% surge recorded in April. Other components also surprised on the downside Several CPI components recorded more moderate increases than their usual seasonal patterns. Clothing and footwear prices rose by just 1.4%, compared to a typical seasonal rise of 2.9%. Fresh fruit prices increased by 3.9%, well below their seasonal average of 8%. Food prices posted a modest 0.2% increase in May, bringing the 12-month increase to just 3.4%. Housing costs, measured by renewed rental contracts—fell by 0.3% during the month, even though they have remained 3.6% higher over the past year. Trend analysis: inflation converges toward upper bound of target The chart below shows Israel’s monthly inflation (bars, left axis), year-on-year inflation (light blue line, right axis), and 3-month rolling inflation at an annualized rate (dark blue line). As of May, both the year-on-year and the 3-month rolling measures have converged toward an annual inflation rate of 3%, which represents the current pace of inflation in Israel and ma...