Israel’s Consumer Price Index (CPI) rose by 0.3% in July, bringing the annual inflation rate down to 3.3%, according to the Central Bureau of Statistics. The figures came as a surprise, as analysts had been predicting a 0.4% rise in the CPI in July. The Bank of Israel’s target range for inflation is 1-3%.
The main factors behind the lower-than-expected inflation were the declines in the prices of clothing and footwear, which fell by 4.8%, and furniture and home equipment, which fell by 1.2%. These items are typically affected by seasonal sales and discounts.
On the other hand, some items recorded notable increases in prices, such as fresh produce, which rose by 3.4%, housing and transport, which both rose by 0.7%, home maintenance, which rose by 0.6%, and food, which rose by 0.4%.
Home prices continue to fall
The Central Bureau of Statistics also released figures for home prices, which are not part of the CPI. A comparison of deal prices in May-June 2023 with deals in April-May 2023 shows a fall of 0.2%. In comparison with May-June 2022, prices in May-June 2023 were 5.2% lower.
The decline in home prices was evident across all regions, with the largest drops recorded in Haifa, where prices fell by 8.9% year-on-year, Jerusalem, where prices fell by 6.6%, and the south and central regions, where prices fell by 5.2% each. Tel Aviv saw the smallest decline, with prices falling by 2% year-on-year.
The fall in home prices is partly attributed to the government’s measures to increase the supply of housing and to curb speculation and investment demand. The Bank of Israel has also raised interest rates several times since November 2022 to cool down the overheated housing market.
Implications for monetary policy
The July CPI report is likely to ease some of the pressure on the Bank of Israel to tighten its monetary policy further, as inflation appears to be moderating after reaching a peak of 3.7% in May. The central bank’s rate-setting group known as the Monetary Committee is widely expected to leave the short-term interest rate unchanged at 1% when it next meets on August 23.
However, some analysts warn that inflation risks remain high, especially due to the global rise in commodity prices, the weakening of the shekel against the dollar, and the uncertainty over the fiscal policy of the new government. Therefore, they expect the Bank of Israel to resume its rate hikes later this year or early next year, depending on the evolution of inflation and economic activity.