Inflation surprises slightly on the downside

ISRAEL - In Brief 18 Sep 2022 by Jonathan Katz

Inflation in August came in slight below expectations * Inflation declined by 0.3% m/m (4.6% y/y), compared with expectations of -0.1% to -0.2%. * Core inflation remained stable y/y at 4.7% (similar to that in July). * The main surprise came from the decline in food prices, while OER prices continued to accelerate. * It is encouraging to note that the PPI excluding fuel declined by 1.1% m/m (5.8% y/y). * We expect inflation to reach 3.2% in the next 12 months as housing and food prices push higher, and higher wages impact the price of public sector services such as education. Implications for monetary policy: A rate hike of 0.5% on October 3rd appears more likely (although 0.75% cannot be ruled out). Rates are expected to reach 3.5% one year from now. The CA surplus declined modestly * The CA surplus declined to 4.1bn in Q2 from 4.8bn in Q1. * The trade account deficit increased by 1bn (mostly due to higher energy costs) and the service account surplus declined by 0.7bn. * Direct investments by foreigners improved in Q2 to 7.2bn from 4.4bn. * We expect the CA surplus to decline to 3.3% GDP this year from 4.5% last year. Fundamentals remains shekel supportive (but less so than in previous 2 years), yet in the short, the shekel will continue to react to market volatility. Job vacancies have stabilized in recent months at a level 50% above pre-Covid, but the job vacancy/labor market ratio has declined modestly to 4.89%, still far from pre-Covid (3.25%). The labor remains rather tight. The second estimate for Q2 GDP growth remained unchanged at 6.8%. GDP growth this year is expected to reach 6%. New home sales declined in July by 15% m/m and by 45% y/y (from high levels on...

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