No inflation surprises in June, but housing prices troubling

ISRAEL - In Brief 15 Jul 2016 by Jonathan Katz

---

Inflation in June reached 0.3% m-o-m and -0.8% y-o-y (similar to last month). Inflation was in line with consensus and our forecast. Inflation was influenced by a 2.8% increase in petrol prices (m-o-m) and a seasonal increase in clothing prices (8.3% m-o-m, 1.3% y-o-y). Food prices declined 1.7% y-o-y in line with declining global agricultural food prices (y-o-y). Housing prices (rental price equivalents) increased by 1.9% y-o-y, slowing from 2.2% last month. Inflation excluding energy declined by 0.2% y-o-y, and the CPI excluding energy and government initiated price cuts (VAT, transportation, TV tax, etc) increased by 0.5% y-o-y (up slightly from 0.4% last month). This "core" inflation definition is closely followed by the BOI and suggests that underlying inflation is still running way below target (1%-3%). Inflation remains subdued in Israel, in line with global trends as well increasing competition in several sectors, especially food imports, travel abroad and telecommunications. Although wages have drifted higher (3.6% y-o-y in the private sector in April), and unemployment low (4.8% in May) this has yet to spill over to significant inflationary pressure. The fly in the ointment is housing purchases prices (a separate survey not factored into the CPI) which increased by 7.8% y-o-y, accelerating from 7.7% last month and 7.2% two months ago. This development troubles both the MOF and the BOI as housing prices are up by over 90% since 2009. Housing demand remains elevated due to low rates, financial market turmoil and a lack of a "safe" alternative investment. The housing issue is the main reason the BOI has ruled out further loosening or quantitative easing (other t...