October’s CPI surprises sharply on the downside

ISRAEL - In Brief 15 Nov 2021 by Jonathan Katz

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October’s CPI increased by 0.1% m/m (consensus expected 0.4%), and declined to 2.3% y/y from 2.5% last month. The main surprise came from the “travel abroad” item (3.7% of the basket) which declined by 7.9% contributing -0.3% to October’s print. This is rather surprising considering restrictions were lifted and travel surged. We note that rapid shekel appreciation of the shekel occurred mostly in November (not October) and will soften the next CPI. The main explanation is basically increasing competition in the travel industry. Other items were mixed, with prices of vehicles increasing by 1.3% (3.5% in the past three months), food prices rose 0.9%, but clothing prices increased rather modestly (relative to seasonality). Core inflation decreased slightly to 2.06% y/y from 2.14% last month. The PPI (excluding fuel) accelerated to 7.5% y/y from 7.2%. The housing purchase index (a separate survey not factored into the CPI) accelerated to 9.9% y/y from 9.2% last month (and 4% in January 21). Property taxes on second-home purchasers will increase from 5% to 8%. The BoI does not view monetary policy as the suitable tool to deal with this frothy asset market, but rather is pushing for increasing housing construction. Our inflation forecast currently stands at 1.5% for the coming year, with a strong shekel offsetting in part the impact of wage pressure, higher rental prices and higher energy costs. Previously, we had expected a rate hike in Q322, but this appears increasingly doubtful, with the pressure for shekel appreciation likely to continue.