September’s CPI comes in as expected, supportive of monetary accomodation

ISRAEL - In Brief 15 Oct 2020 by Jonathan Katz

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Inflation in September declined by 0.1% m/m and declined by -0.7% y/y (following -0.8% in August), coming in according to expectations (market and ours), although several local forecasters expected zero m/m.Core inflation (the CPI excluding energy and fresh produce) inched slightly higher to -0.4% y/y from -0.5% in August, but clearly is remains well anchored in negative territory. The PPI excluding energy remains negative, down -1.9% y/y in September, similar to August. Nevertheless, the devil is in the details. Prices of housing rental equivalents (17.2% of the CPI) in September actually accelerated to 1.6% y/y from 1.4% both in July and August. This reverses the downward trend which commenced in April (2.3% y/y). We had expected housing rentals to continue to moderate y/y. This could be a quirk in measurement, or an actual uptick in demand as the economy opened up in the summer months. Food prices (excluding fruits and vegetables) offset this upward rental price surprise, declining by 0.7% m/m and by -0.3% y/y. This is mostly due to the Jewish New Year Holiday food sales, which usually corrects upwards the following month. Housing purchase prices (a separate survey not factored into the CPI) actually moderated to 2.3% y/y from 2.9% last month and are up 1.4% YTD. Bottom line: Despite this upward rental price surprise, core (and headline) inflation remains negative and supportive of further monetary accommodation one week from now. Clearly, the economic slowdown will be a more important consideration for the MPC. We expect a more dovish forward guidance (assuring low rates for several years), a possible rate cut to zero, and an enlargement of the government bond purc...