Israel's inflation drops in May, defying early predictions

According to the latest data released by the Central Bureau of Statistics, the Consumer Price Index (CPI) in Israel rose by only 0.2% in May, which was less than the increase the markets had been expecting. This progress is reflected in a decline in the annual rate, which is now standing at 4.6%. Experts were taken aback by these numbers because they envisioned an increase of 0.4% to 0.6% instead, or 5% on annualized basis.

The unexpected decrease in the CPI can be attributed to various factors, as discussed by experts in the field. Yonatan Katz, the chief strategist at Leader Capital Markets, points out that the food sector did not experience the anticipated rise in prices, while clothing prices dropped significantly, even beyond the usual seasonal fluctuations.

According to Guy Beit Or, the chief economist of Psagot Investment House, the downward surprise in the CPI was primarily caused by the food, clothing, and footwear sectors of the economy. He suggests that despite the announcements of widespread price increases in May, the discounts offered during the Shavuot holiday had a positive impact on the final CPI reading.

Gil Bufman, Bank Leumi's chief economist, categorizes the price increases and decreases into different sections. The "goods" sections, such as furniture, household equipment, clothing, and footwear, experienced price decreases, contributing to the surprise in the index. On the other hand, the "services" items, including education, culture, and entertainment, saw an increase of 0.6%.

Regarding the Bank of Israel's interest rate decision in three weeks' time, some experts suggest that the positive CPI figures, along with the favorable momentum of the shekel, indicate an improvement in the bank's fight against inflation. In addition to the Federal Reserve's decision to stop raising interest rates yesterday and the continued recovery of the shekel against the dollar, it is now quite possible that the Bank of Israel will not need to intervene in July.

Looking ahead, Ofer Klein, head of the economics and research department at Harel Insurance and Finance Group, provides a forecast for the next CPI readings. He anticipates an increase of approximately 0.2% in the June index, with the decline in clothing, fruits, and vegetable prices offset by higher rent and transportation costs. Klein expects the trend of declining inflation to continue, with an estimated increase of 0.3% to 0.4% for the July index. He projects a drop in inflation to 2.7% over the next twelve months, considering the current exchange rate.

It is worth noting that while the stabilization of the exchange rate is crucial for the decline in inflation to persist, the value of the shekels is heavily dependent on political developments in Israel, specifically the judicial reform, which makes it a factor that should be carefully monitored.

This article originally appeared here and is reposted with permission.