Psagot building (photo by Alexander Katz)
We saw the first signs in June, but the July index has already brought inflation to Israel in a big way. The main cause of the surprise in inflation in July – the housing section which jumped by 1.1% (our expectation was 0.7%+) when it is estimated that it will continue to accelerate in the coming months as well.
The surprises in the July index were horizontal with the exception of the food section which actually surprised downwards. In total, 8 of the 10 main sections recorded an acceleration in the annual inflation rate. As mentioned, especially we saw a dramatic acceleration in the housing section which has already increased to a rate of 5.0% and together with it food prices jumped by 5.5% in the last year, and transportation and communication prices jumped by 11.3%. In light of all this, there are good chances that the Bank of Israel will raise the interest rate by 0.75% next week, according to Guy Beit Or, the chief economist of Psagot.
In the July index, it is evident that the weight of the inflationary pressures in the Israeli economy is shifting from products to services – housing, education, leisure, professional services, and more – all accelerating, a sign that the internal dynamics between the tight labor market and inflation is increasing.
In a welcome way, the CBS began to detail the source of the changes in their sample of apartments and stated that for 10% of the tenants in the sample, a contract was renewed in the period under review and in which there was an average increase of 3.5% in the rent. In addition, 4.0% of the tenants in apartments where there was a change of tenant saw a 7.0% increase in rent the monthly apartment.
More in-
Also in the housing market, housing prices continued to heat up when in the months of May-June prices jumped by 2.0% after an increase of 1.5% in the months of April-May, which led the annual rate of increase to increase from 16.1% to 17.8% – the increase in housing prices ensures that The pressure on the housing section of the index will continue in the coming year as well.
We have been careful to point out for many months now that the risks surrounding the inflation forecasts are biased upwards. Although in the last two months the index surprisingly went down, the underlying trends clearly signaled the increase of inflationary pressures in the Israeli economy. The July index brings the inflationary pressures to the fore and gives a very clear signal to the Bank of Israel – to press the brakes.
Some argue that the increase in the shekel may somewhat cool the desire of the Bank of Israel to sharply raise the interest rate, but at least in our estimation, these days the shekel is not a major consideration, especially not in the short term since the shekel has strengthened significantly in the recent period mainly due to the increases in the markets.
In our estimation, the data for the month of July, together with all the other data from the real economy, will lead the Bank of Israel to even consider a move of 0.75 basis points in its decision next week.
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