May’s CPI surprises sharply downwards

ISRAEL - In Brief 15 Jun 2023 by Jonathan Katz

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Core inflation moderates sharply Inflation in May was up 0.2% m/m, below the consensus range of 0.5%-0.6% (we had expected 0.5%). Inflation in the past 12 months declined to 4.6% from 5.0% last month. May’s CPI was influenced by stability in food prices (expectations were for a 0.5% increase or more), and apparel prices declined by 3.6%, seasonality adjusted and 8.5% y/y. Fruits and vegetables also increased below seasonality. On the other hand, housing prices (OER) increased by 0.5% and by 7.6% y/y, accelerating from 7.2% last month. Core inflation (the CPI excluding energy and fresh produce) slowed to 4.9% y/y from 5.26% last month. The PPI (excluding fuel) was down 0.3% m/m and up 2.0% y/y (moderating from 2.8% last month). Housing purchase prices (a separate survey not part of the CPI) declined by 0.2% in the last survey and up 9.8% y/y moderating from 11.1%. Implications for monetary policy: Clearly, further tightening is off the table, due to both a low CPI print in May with a sharp decline in core inflation, and due to the sharp shekel appreciation in June, which will moderate inflation in coming months. We expect the first-rate reduction in early 2024, assuming the shekel remains stable.