Inflation in May comes in slightly below expectations

ISRAEL - In Brief 15 Jun 2021 by Jonathan Katz

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The CPI in May increased by 0.4% m/m and by 1.5% y/y (following 0.8% in April), slightly below market expectations of 0.5% m/m (and ours). Core inflation (the CPI exc. energy and fresh produce) accelerated to 1.0% y/y from 0.45% last month. The downward surprise in May came from clothing prices which rose by only 2%, below a much higher seasonal factor of 9%. We note that clothing prices are down 2.3% y/y despite the opening up of malls and pent-up demand (compared to last May’s weak demand during Covid). Food prices (other than fresh produce) declined by 0.1% m/m (+0.7% y/y) despite higher agricultural commodity prices. Domestic vacation prices increased by 8.5% m/m (18.5% y/y) due to pent-up demand and lack of flights abroad. Events and parties were up 4% m/m and 11.2% YTD as restrictions were lifted. Housing (equivalent) rental prices accelerated slightly to 1.3% y/y from 0.9% last month. Housing purchase prices (as separate survey not factored into the CPI) rose by 1% m/m and by 5.6% y/y from 4.5% last month. In the past six months housing prices are up 9.4% annual. This has caused concern at the Bank of Israel and we expect some form of macro-prudential measures to stem demand (new home sales are up 35% y/y in April), but no reaction on policy rate decisions. At present, we expect inflation to reach 1.2% in the next 12 months, as the transitory factors dissipate, while housing rental prices accelerate. The apppreciating shekel will have a moderating impact on inflation. The new Minister of Finance declared that no tax hikes are expected, but he will move to freeze or even lower public sector wages, which will be disinflationary.