| Ofer Klein, head of the economics and research department at Harel Insurance and Finance
| On Sunday, the latest consumer price index for 2022 will be published, inflation is expected to remain at 5.3 percent
On the first of the coming December, the index will be published and in our estimation the index will rise by 0.3 to 0.4 percent in light of the increase in the prices of fuel, vehicles, rent, alongside more moderate increases in the prices of food and clothing (warmer than usual winter). The index will be offset by a seasonal drop in holiday prices.
Thus, looking back, inflation will remain unchanged at a record level (5.3%). Regarding the January index, we expect an increase of about 0.2-0.1 percent when a seasonal decrease in clothing prices will be offset by an increase in food prices and of course the high increase in electricity and water prices.
There is uncertainty in the short-term forecasts as we wait to see when the Minister of Finance’s statements about the cancellation of the levy on disposable utensils and the tax on sugary drinks, along with the statements about freezing/reducing the increase in electricity and water prices, will actually come true.
Without significant government intervention in the next two months, we expect that, looking back, it will remain above 5 percent. Later this year (and as long as we do not see a significant recovery in activity in China) we will see a moderation in the rate of price increases in light of the decrease in global commodity inflation, the easing of supply chains and of course the increase in the Bank of Israel which will translate into a decrease in demand.
However, as we have previously stated, in our estimation inflation in Israel is more “sticky” compared to developed countries in light of the more consolidated labor market, the wage agreements taking shape in the government sector, the positive demographics and the increase from the world, the lowest competition in some industries, the rent prices, etc.’ Therefore, as we mentioned last week, we do not rule out that the Bank of Israel will raise the interest rate in the coming months beyond the forecast of the research division at the Bank of Israel (4%) and beyond what is currently embodied in the bond market.
The government’s statements about its intention to help lower prices are legitimate, but in our opinion, if this is done mainly by increasing the government deficit, this is a recipe for failure. A consistent increase in the deficit could damage Israel’s positive fiscal reputation, which would be reflected in the devaluation of the shekel. Which in itself will increase the imported inflation and thus can make the government’s measures to lower prices useless.
In addition, such a dynamic, if realized, will also oblige the Bank of Israel to maintain a higher interest rate for a longer period of time in order to moderate the pressures for devaluation.
| US employment figures continue to be strong but the weakening trend continues
The chances are increasing that we will see an increase of only 0.25 percent in early February, this will be clearer after the release of inflation data this week.
In December, about 220,000 were added (and the figures for the previous two months were updated downwards), the rate dropped to 3.5 percent and the number of vacancies (in November) remained over 10 million.
also continued to rise, but the rate moderated when the annual growth rate in hourly wages dropped to 4.6 percent and 3.1 percent in the weekly calculation due to a decrease in total working hours per employee. A decrease in the total number of working hours per employee is a well-known phenomenon that occurs before a moderation in economic activity, when employers are not in a hurry to fire employees especially against the background of the difficulty encountered, until recently, in recruiting employees following the departure from the restrictions of the Corona virus.
In our estimation, later this year as the economic slowdown intensifies, we will also see an increase in unemployment rates.
| The Purchasing Managers’ Index for the service industries of the ISM Institute dropped sharply in December
Part of this may be due to the unusual weather. The sentiment of the companies continued to weaken in December as well, according to indicators when the contraction continued in the industrial sector. The price pressures in the industry also continued to decrease, which supports a further decrease in the rate of inflation in December as well.
The corresponding (and more significant) index for the service industries fell in December to 49.6 points. In doing so, he recorded an unusual decrease that was the sharpest since 2008 (without the corona virus). We suspect that the unusual weather in December that affected consumption with an emphasis on tourism contributed to this, so it is still too early to draw conclusions about a significant weakening of economic activity.
The focus this week will be on data that will be published on Thursday. We expect a continued moderation in the rate of price increase mainly due to the decrease in energy and tourism prices which were negatively affected by the unusual weather in December that prevailed in large parts of the country. In our estimation, the slowdown in the rate of wage growth alongside the low purchasing managers’ indices and the expectation of a further decrease in inflation on Thursday support the fact that on February 1st the central bank will raise the rate by only 0.25 percentage points.
| The warm winter in Europe and the lower than usual consumption of electricity continued to lower inflation
Despite the fears of an imminent recession, the whole of the data supports another increase of half a percent by the central bank.
The warmer than usual winter in Europe led to a further decrease in energy consumption and a drop in prices, so they dropped rapidly in November and are “only” 28 percent higher in the last 12 months. Inflation in December (according to the initial estimate), fell for the second month in a row to 9.2 percent.
However, excluding food and energy products, core inflation rose to 5.2 percent, evidence of the strength of local demand supported by the tight labor market.
The publication reinforces our assessment that we will see a continued decline in general inflation in the coming months, but not necessarily in Therefore, the central bank in the Eurozone will continue to raise interest rates by another half a percentage point on February 2, despite estimates of a more moderate increase in the US the day before. The expected differences in central bank policy have contributed to the recent strengthening.
The writer is the head of the economics and research department at Harel Insurance and Finance. The author(s) and/or companies in the Harel Group and/or those interested in them and/or those controlling the group, may own and/or trade, for themselves and/or for others, the securities and financial assets indicated in this review. This review should not be seen as investment marketing or a substitute for investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the writer’s opinion at the time of publication, and this can change at any time and without further notice. The company will not be responsible, in any form, for damage and/or loss that will be caused, if caused, as a result of relying on this review, and also does not guarantee that relying on the information that appears in it may yield profits.