December’s CPI surprised on the downside, declining 0.1% m/m (-0.7% y/y compared to -0.6% in November). Core inflation (the CPI excluding energy items and fresh produce) reached -0.4% y/y in December, following -0.2% in November. The main inflation surprise came from the housing rental item (17.2% of the basket) which remained stable m/m while we had a expected a seasonal increase of 0.5%. In annual terms, housing rental prices moderated sharply to 0.2% y/y from 1.1% in November and 1.7% in October. This sharp decline was not witnessed earlier this year following the 1st or 2nd lockdowns. Meanwhile, housing purchase prices (a separate survey not factored into the CPI) accelerated, up 3.2% y/y from 2.7% last month and is up 2.3% in the past six months. The combination of strong demand and a decline in housing completions explain the pressure for higher housing prices. Looking forward, we expect this to spillover to housing rental prices and contribute to higher inflation, especially when the economy opens up. The shekel continued to weaken today off the back of the Bank of Israel’s announcement regarding a commitment to purchasing 30bn USD in 2021. The trend is likely to continue in the short run before we see some stability and possibly a slight appreciation. We will be revising our inflation forecast slightly higher due to this more accommodative policy (a form of QE) in our next weekly macro review.
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