Inflation in August surprises on the downside
The CPI remained stable (0.0% m/m) in August and declined by 0.8% y/y (from -0.6% y/y in July). Market expectations (and ours) were for a higher CPI of 0.2% m/m.There was no one factor explaining this low print, eight out of the ten major CPI items witnessed lower or stable prices. Domestic vacation costs increased by 16% m/m (-12.9% y/y), while we had expected 25%, in light of the lack of a travel abroad option for Israelis. Lower purchase tax on second homes contributed nearly -0.1% to the CPI (we had expected half that). The only upside surprise came from prices of housing rental equivalents (17.2% of the basket) which increased by 1.4% y/y similar to last month, while we had expected some moderation. Core inflation (the CPI excluding energy and fresh produce) declined to -0.5% y/y from -0.4% last month. The PPI excluding energy declined by 1.9% y/y (from -1.8% y/y in July). In short, inflation (or should be say deflation) remains low and moving away from target. In normal times this would not sway the Bank of Israel to change policy, but considering the upcoming second lockdown this Friday (for three weeks, at least) with expected deceleration and higher unemployment, additional monetary stimulus appears increasing likely. This could mean pushing rates lower to zero and/or additional tools such as LTRO to the commercial banks at negative rates (similar to ECB). The next rate decision is on October 22nd.