After several indicators that surprised for the better, the price index arrived for the month of July that blew the cards and far exceeded the early predictions in the market and reflected an annual inflation rate of more than 5% – the highest since 2008.
Although it is still possible to boast of a low inflation rate compared to the developed countries in the West, such as an inflation rate of over 8% in the US and 9% in Europe, nevertheless it seems that the July index reflected the price increases that had been delayed from appearing until now – and this time they were a bad surprise.
● The high pace in the West: growth in Israel jumped by 6.8% in the second quarter
Almost all items in the consumer price index in July rose above the forecast. The sections on housing and expenses on trips abroad stood out in particular, which seem to be the last to catch up with the rate of price increases recorded since the beginning of the year. The section on accommodation and recreation in Israel and abroad increased by 7.7% in July. This is an increase due to demand and going on vacation during the summer, but these prices should decrease with the beginning of September.
The explanation for the surprising jump in flight prices can be attributed to the increase in fuel prices. However, flight prices fell already in August, especially in light of the strengthening of the shekel. Recall that the CBS measures flight prices in shekel terms.
Fuel prices also had a contribution to the increase in the transportation section, which alone contributed 0.17% to the July index. However, the expectation for the coming months is to moderate in view of the drop in energy prices which was not reflected in July, but will be reflected in August.
Another factor that surprised negatively in July despite the talk of a consumer boycott was the food section, which rose by 0.5% in July and reflected a 5% increase in prices on an annual basis. This, following the effect of the sharp increase recorded in the prices of agricultural goods throughout the first half of the year following the war between Russia and Ukraine.
If the Diplomat company had to absorb the fire when it came to raise prices to the point of threatening a consumer boycott that forced the company to withdraw, it seems that the food chains managed to temporarily escape the focus – which was reflected in a sharp increase in food prices in July, and this in neutralizing the increase in the prices of fruits and vegetables.
Fresh fruit prices alone contributed to an increase of 0.08% in the July index after rising by 8.5% in the past month. Despite the increase in July, in the summary of the last year the prices of fresh fruits still decreased by 5.7%, when the effects of the reform of the treasury are still ahead.
Modi Shafferer, chief market strategist of Bank Hapoalim, points us to a measurement change by the CBS that contributed to the increase: “Unlike in the past, in July the CBS began measuring avocado prices, which jumped by 52.8% in July and contributed to the increase in the prices of fruits and vegetables.”
Another surprising factor recorded in the July index was the housing component which increased by 1.2% in one month. This is a sharp increase 3 times the seasonal increase in this component in the last five years. The housing component contributed 0.29% to the July index.
The “owned housing services” component, which is part of the housing component, increased by 1.1%, so that the annual rate of increase of this component increased by 4.7% – and thus one of the main inflation risks indicated by the Bank of Israel is indeed materializing.
At the same time, the rent component of the index rose by 0.7% in July – this is an additional component that examines rental prices, but all contracts (not just the renewable ones). This component rises sharply in the summer months, when most leases are opened. The rate of increase is therefore expected to moderate greatly starting in September.
And yet – if you want to draw optimism after the publication of the July index, it is advisable to look ahead to the following months. There you can find a host of reasons that indicate that the indices may be much more moderate. Here they are for you:
1. The drop in oil prices will be reflected in the August index
The sharp drop in the price of oil was not significantly reflected in the July index, but is expected to be reflected in the consumer price index in August. The government may extend the validity of the tax reduction on fuel, so the contribution to the decrease in the energy component may be double in light of the sharp drop in the price of oil.
If the price of fuel last month cruised above levels of 110 dollars per barrel, then today it is trading at the level of 88 dollars per barrel – as if there was no invasion of Russia into Ukraine.
According to Modi Shafferer from Bank Hapoalim, the sharp drop in fuel prices in August is expected to lower the index by 0.65%, and at current price levels fuel prices are expected to continue to drop sharply in September and lower the index by another 0.25%. “In summary of the last year, the jump in fuel prices in Israel directly increased the index by 0.9% (that is, the index without energy increased “only” by 4.5%). Looking ahead: fuels will lower the August index by 0.65% and at the current price level of the dollar/ NIS from refining and oil profits – will lower the September index by 0.25%,” says Shafrir. “In other words, from a contribution of 0.9% to the index in the last year, the drop in the price of oil is expected to detract 0.9% from the index in the next two months.”
2. The appreciation of the shekel will moderate inflation
Since the Bank of Israel’s previous interest rate announcement at the beginning of July, the shekel has recorded an unusual strengthening of about 8% against the basket of currencies. The strengthening of the shekel has a moderating effect on imported inflation – and thus, the power of the shekel in curbing imported inflation that stopped in the second quarter of the year after the currency weakened sharply in the first half of the year – will again be reflected.
Although the rapid appreciation of the shekel was recorded in July, the impact on the real economy is expected to come only later, so the rapid appreciation is a reason for optimism.
3. The drop in commodity prices will have a positive effect
The Israeli economy is not directly exposed to the consequences of the war in Ukraine, but is nevertheless affected by the prices of agricultural goods in the shadow of the jump registered with the invasion of Ukraine. The surge in commodity prices resulted in a 7% increase in tradable product prices, among other things due to the problems in the global supply chain and the surge in transportation prices.
However, since then commodity prices have moderated sharply from the peak and recorded a 25% drop. If this level is maintained, this may be reflected in the decrease of marketable products in the following months.
Beyond that, the situation of Israel’s trading partners who have to deal with a sharp increase in inflation may also improve if the drop in commodity prices is indeed maintained.
4. A global slowdown will also affect prices in Israel
The expected significant slowdown in global growth may lead to the same trend in the local economy as well. The global environment now supports a slowdown in price increases, mainly in light of the significant drop in freight and oil prices.
The drop in shipping prices is expected to moderate inflation caused by disruptions in supply. Since January of this year, there has been a drop of more than 20% in transport prices, and these may translate into price drops in the future. At the same time, the interest rate increases by the Bank of Israel are expected to affect the economy only in the coming months – which may lead to a tightening of the belt and, accordingly, a drop in prices.