Israel September CPI – a sharp downside surprise strengthens the case for rate cuts

ISRAEL - In Brief 16 Oct 2025 by Sani Ziv

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September CPI surprise: inflation eases sharply to 2.5%, driven by stronger shekel and seasonal factorsIsrael’s consumer price index fell by 0.6% in September, double our forecast for a 0.3% decline. As a result, annual inflation eased to 2.5%, its lowest since February 2024. The decline clearly reflects seasonal patterns; however, several components fell more sharply than expected, contributing to the downside surprise. The main surprise for us came from food prices, which fell by 0.5% compared to our forecast for a 0.1% increase. The recent appreciation of the shekel likely contributed to this trend, especially in imported goods. Fresh fruit prices also fell sharply (3.3%), exceeding seasonal behavior. In the services category, results were mixed. Overseas travel prices fell by 8.6% (in line with the new CBS seasonal adjustment), while domestic recreation declined by roughly 9%, slightly more than usual and possibly reflecting peak pricing in August. The housing component was unchanged, slightly below expectations, while health services rose more than expected (0.3%). Overall, services inflation was weaker than anticipated. The shekel strengthened by 1.3% against the U.S. dollar in September and by nearly 10% cumulatively since April, creating further downward pressure on tradable goods such as apparel, footwear, and household equipment. Based on Bank of Israel estimates, the pass-through between the exchange rate and consumer prices is roughly 10-15%. While elasticity tends to be lower in periods of currency appreciation, a 10%-shekel appreciation (about 8% against the currency basket) is still expected to reduce the CPI by at least 0.5-1.0 percentage points. The an...