Rate stability expected due to high inflation

ISRAEL - In Brief 15 May 2024 by Jonathan Katz

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April’s CPI surprises on the upside Inflation in April was up 0.8% (consensus and my forecast were at 0.6%) and accelerated to 2.8% y/y from 2.7% last month. Core inflation accelerated to 2.4% y/y from 2.3%, but excluding government measures (cigarette tax hike), core inflation was up only 2.1%. The main item that surprised upwards was flights abroad which increased by 18.7% m/m (up 8.8% y/y). We have been warning that this item has much catching up to do in light of the lack of carriers flying out of Israel and the spike in flight prices. The CBS measures this item (1.8% of CPI) in a lagged mode of up to seven months. In addition, the housing item (mostly rentals) was up by 0.6% m/m, higher than expectations, due to a 4.6% increase in indirect costs of housing purchases (lawyers, agents, taxes). Ownership equivalent rents (annual) remained stable for the third straight month at an annual pace of 2.0% y/y. Other items which contributed to the CPI were seasonal, including a 1.7% increase in apparel prices and 7.7% increase in domestic vacations. The PPI excluding fuel increased by 1.5% m/m and by 0.9% y/y (up from -0.2% last month). The housing (purchase) price survey (not factored into the CPI) increased by 0.9% in the last survey and is up 3.6% in the past four months. Implications for monetary policy: Policy has been focused on the level of geopolitical risk and shekel volatility since the war broke out. Risks remain elevated and this higher-than-expected CPI print will further reduce the chance of a rate cut on May 27th. In general, it is difficult to envision a cut this year, as we see inflation accelerating this year on fiscal expansion, a tight labor market, high...