​Inflation remains low in June

ISRAEL - In Brief 15 Jul 2020 by Jonathan Katz

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The CPI in June came in at -0.1% (-1.1% y/y from -1.6% in May) similar to our forecast and similar to the Bloomberg consensus, although local forecasters were expecting an index of zero m/m. June’s CPI was impacted by a 8.6% increase in petrol prices (contributing 0.25% to the CPI), which was offset by a price decline in eight out of the ten major categories. Fresh produce declined by 6.1%, other food items (-0.2%), apparel (-0.8%), and housing (-0.1%). Rather surprising was the 4.8% m/m (-16.9% y/y) decline in hotels and local vacation costs as hotels dropped their prices in order to draw worried Israelis following the shutdown. Housing rental (equivalent) prices moderated, up 1.7% y/y from 2.3% two months ago, but this item is expected to moderate further in coming months due high unemployment and income erosion. Core inflation (the CPI excluding energy and fresh produce) declined by -0.5% y/y, similar to last month. The PPI excluding fuel declined by 2.3% y/y in June from -1.5% y/y in May. Clearly, low inflation (or deflation) is well entrenched due to the demand shock offsetting any supply chain disruptions. Housing purchase prices (a separate survey not factored into the CPI) show that housing prices declined by 0.7% m/m (up 2.0% y/y following 3.2% last month), the sharpest monthly decline since end-2017. Implications for monetary policy: We note that in the last monetary statement, the inflationary environment was the last factor mentioned (during pre-Covid times it was the first), following the real economy, global trends, the shekel, credit, etc. This low inflation print will most likely not convince the MPC to push rates to zero. The main tools which will cont...