The wave of travel abroad by Israelis is expected to reduce the consumption of Israelis in local chains. Revenue from retail chains from November to February has fallen slightly, and we estimate that this trend is expected to continue in the coming months. To see that this is mainly a contribution of services, probably against the background of the decline in morbidity.
The employment rate rose to 60.6% in February and the unemployment rate stabilized at 3.7%. The tight labor market and in our estimation we are expecting increasing pressure for wage increases, which will be reflected in the coming months. Wage increases are a risk factor that may leave inflation high over time. Prices of oil or agricultural commodities can rise, but also fall. The effect of inflation on these prices is not high. Wages on the other hand are less likely to update downwards although we have seen periods of recession with declining wages and it may be affected by actual inflation.
Towards very high price indices – the March index is expected to rise by 0.8% and the April index by 0.9%. These price increases will be affected by fuel prices, a sharp rise in travel prices abroad and seasonal factors. Inflation in the coming year is expected to stand at 3.1%, assuming we see a slight decline in world oil prices later this year. We see that these are now affecting all clauses, including the services industries. The effect of the interest rate on inflation is low and slow, and is more designed to prevent the risk of further escalation in the level of inflation. Added to that is the policy now aimed at.
Falling oil prices and appreciation of the shekel moderated short-term inflation expectations. In the past week, inflation expectations for the short term derived from the bond market moderated by about 20 basis points. Inflated inflation for two years fell to about 3.8%. Over the ten-year period, implied inflation remained unchanged at 2.7%. , These are still high relative to inflation in derivatives (a gap of about 30 basis points over a ten-year period), which implies in our estimation the premium of inflation risk inherent in bond prices.
Towards raising interest rates in Israel – next week the interest rate is expected to rise by 0.15% to a level of 0.25%. There is also a certain probability that the Bank of Israel will choose to raise the interest rate to 0.5%, in light of the fact that the US markets now embody interest rate increases in doses of 0.5%. And in light of the fact that the uncertainty regarding inflation will not become clear in the near future, we estimate that central banks, including the Bank of Israel, will raise interest rates, at least to the point where we see real interest rates reset, meaning that interest rates are higher Gradually, therefore, interest rate increases in Israel will continue at least to a level of about 2%.
In contrast to the American curve, which is partially inverted, the Israeli yield curve has a positive slope along its entire length. Some economists see the reversal of the American curve as a prelude to a sharp slowdown that will require a change in the Fed’s monetary policy. By the same token, it can be said that this slowdown is not expected to reach Israel. An alternative interpretation that seems more plausible to us now is that the markets estimate that the long-term real interest rate is low today compared to the past, so even if the Fed responds to the high inflation data in the coming year, it is a process that does not represent the long-term real interest rate. In Israel, on the other hand, the market embodies much more moderate interest rate increases over the next two years, so the curve is not reversed either.