Signs of inflation moderation, except for rental prices

ISRAEL - In Brief 16 Jan 2023 by Jonathan Katz

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December’s CPI surprised slightly on the downside Inflation in December reached 0.3% (below expectations for 0.4%) and 5.3% y/y (similar to rate last month). Core inflation moderated to 5.0% y/y from 5.3%. Housing rental prices (OER) accelerated to 6.3% y/y from 5.9% while other service prices moderated to 5.8% from 6.2%. Housing purchase prices (as separate survey not factored into the CPI) slowed to 18.8% y/y from 20.1%, while increasing by 0.3% m/m. We expect inflation to slow to 2.7% in the next 12 months as housing rental prices moderate and economic growth slows. Strong fiscal performance in 2022 not likely to repeat this year 2022 witnessed a fiscal surplus of 0.6% on strong revenue growth of 14% and soft expenditure growth of 5.6% (below fiscal allocation). 2023 will be more challenging (more so 2024), as tax revenue growth slows (or turns negative) while expenditure accelerate. Nevertheless, for nearly half of 2023 Israel will be without an approved budget which will be fiscally restrictive. 2022 witnessed strong manufacturing export growth, Total manufacturing exports expanded by 20.6% in dollar terms. The leading sectors (non-energy) were pharma (up 81%), defense (37%), and electronic components (26%). 2023 will most likely witness slower growth due to slowing global demand, despite further rapid growth in defense exports. The BoI estimate is for 2% growth in exports (including service exports) and 4% growth in imports. This reasonable forecast will lead to a decline in the trade/service account surplus. FX: last week, the shekel appreciated by 4.1% against the dollar and by 1% against the Euro, mostly likely due to higher equity markets abroad and global do...