IBI Investment House Ltd. believes that the Consumer Price Index (CPI) will rise by double the amount originally predicted in November - 0.2% instead of 0.1% - due a fresh surge in the prices of fruits and vegetables. IBI nevertheless does not think that this gain will lead to revisions in forecasts for the rise in the CPI for 2010 as a whole, because prices will fall in December.
IBI's 12-month inflation forecast is 2.7%, higher than the 2.5% forecast Bank of Israel, but it disagrees with the Bank of Israel over the components of the CPI. The Bank of Israel believes that the housing item of the CPI (rent) will rise by 6-8% over the next 12 months; the 7% mid-point rise will boost the CPI 1.6%. IBI believes that the housing item will rise by just 1%.
IBI believes that inflation will be mainly driven by a combination of high inflation costs and strong domestic demand, which is driven by the low unemployment rate and expectations of higher salaries in real terms. High inflation costs are caused by several factors, including the steady rise in commodities prices, especially food commodities, higher salaries, and government decisions. The latter include rate hikes for water (probably in January), electricity, the excise on diesel and gasoline (which is included in the 2011-12 budget bill), a gradual rise in the minimum wage, and higher employer provisions for National Insurance.
These factors will have both direct and indirect effects on the CPI. Direct effects include higher prices for utilities, fuel, and other items; indirect effects include higher prices for many good and services due to higher production costs and the ability to roll these onto consumers given the strong demand.
IBI predicts that the interest rate will reach 3-3.25% by the end of 2011.
Published by Globes [online], Israel business news - www.globes-online.com - on November 30, 2010
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