Four reasons to believe Israel's inflation has peaked

Despite the unexpectedly high July CPI reading, economists are optimistic that Israel's inflation rate is set to fall.

After several months in which the rise in the Consumer Price Index (CPI) was lower than expected, July’s reading of a 1.1% rise was way above expectations and ostensibly changes the picture, with annual inflation in Israel now more than 5%, the highest figure since 2008.

Inflation in Israel is still considerably lower than in other developed countries - 8% in the US and 9% average in Western Europe, nevertheless, July’s inflation figure came as an unpleasant surprise.

Almost all categories rose in July with housing costs and international flights standing out and domestic and overseas vacation costs rising 7.4% in July. These prices will fall in September after the summer vacations, while the cost of flights has risen both because of demand and the rise in price of jet fuel. Fares have already fallen in August because the Central Bureau of Statistics measures prices in shekels and the Israeli currency has been strengthening.

Fuel prices alone contributed 0.17% to the July CPI and the recent fall in energy prices will be reflected in the August CPI.

Another unexpected unpleasant factor in July was a 0.5% rise in food prices, following the influence of price rises in food commodity prices in the first half of 2022 due to the Russia-Ukraine war.

But despite the higher-than-expected July CPI, there are four reasons to be optimistic that inflation will moderate in the coming months.

1. The fall in oil prices will be reflected in August’s CPI

The sharp fall in oil prices was not yet significantly reflected in the July CPI but will be expressed in the August CPI. The Israeli government may extend the period in which excise tax is cut, so that the fall in the energy component of the CPI will be amplified when combined with the sharp fall in oil prices on world markets.

If the price of a barrel of oil rose above $110 in July, today the price is down to $88, and it is almost as if there was no Russian invasion of Ukraine.

Bank Hapoalim chief strategist Modi Shafrir estimates that the sharp fall in fuel prices in August is expect to lower the CPI by 0.65%, and fuel prices are expected to continue falling from their current levels through September and bring the CPI down a further 0.25%. He said, "Summing up the past year, the jump in oil prices in Israel directly lifted the CPI by 0.9%. But looking ahead, fuel will lower the CPI by 0.65% in August and the current level of prices of the dollar/shekel on refining margins and oil - will lower the CPI in September by 0.25%. In other words, from a contribution of 0.9% over the past year, the fall in oil prices is expected to deduct 0.9% from the CPI in the coming months."

2. Appreciation of the shekel will moderate inflation

Since the previous interest rate announcement by the Bank of Israel on July 4, the shekel has strengthened 8% against the basket of major world currencies. The appreciation of the shekel has a moderating influence on imported inflation. Thus the strengthening of the Israeli currency, which came to a halt in the second quarter in halting imported inflation after weakening sharply in the first half of the year, will again express itself.

Although the shekel appreciated rapidly in July, the real economic impact of this will only be seen in the future, but in any event the swift strengthening of the Israeli currency is major cause for optimism.

3. The fast fall in commodity prices will have a positive influence.

The Israeli economy is not directly exposed to the fallout from the war in Ukraine, but it is influenced by the jump in agricultural commodity prices that followed the Russian invasion. The leap in prices resulted in a 7% hike in commodity products, among other things, because of global supply chain problems and the jump in shipping prices.

But recently commodity price rises have moderated sharply and are currently down 25% from their peak. If it remains at this level, this will be expressed in a fall in commodity prices in the coming few months.

4. Global slowdown will impact prices in Israel

Forecasts of a major slowdown in global growth might lead to a similar trend in the domestic economy, although meanwhile Israel posted unexpectedly high growth of 6.8% in the second quarter of 2022. In any event the global economic environment supports a more moderate rise in prices, mainly due to the considerable fall in oil and shipping prices.

The fall in shipping prices is expected to moderate price rises caused mainly by supply chain disruptions. Since January 2022, shipping prices have fallen by 20% and this should translate into a fall in prices in the future. At the same time, the interest rate hikes by the Bank of Israel are only expected to impact the economy in the coming months and this might bring about belt tightening, and as a result price falls.

Published by Globes, Israel business news - - on August 17, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

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