| Alex Zbzinski, the chief economist of Meitav Dash |
In Israel for the month of November it increased by 0.1% in accordance with the forecast. There were no special surprises except for a lower-than-expected increase in clothing prices. The inflation rate rose to 5.3%, including the index without energy. The inflation rate of the non-tradable items that represent the core of inflation rose to 5.3%, the highest since 2009. Prices also rose in the tradable items at a similar rate.
Thus, the inflation environment continues to be on the rise with no significant signs of moderation. Why do we still estimate that it will start to decline in the coming months?
The increase in inflation is not spread over many items. The number of sections and sub-sections in which the annual inflation rate increases is in a fairly rapid decline. The proportion of these items out of the total items had in the last decade a close correlation with the general rate of inflation.
In the last year, the inflation rate increased from 2.4% in November 2021 to 5.3%. Below are the sections that contributed to the change in the rate of inflation. We emphasize that this is a donation for change In the rate of inflation and not in total contribution to inflation in the last year:
the trips abroad Donate about 1% (the weight of the section is 3.7%) – it can be assumed with a large degree of confidence that the huge donation is related to getting out of the corona and will not repeat itself in the coming year.
The housing section Contributed about 0.9% to the change in the rate of inflation (weight of the section 24.7%). Meanwhile, price increases in renewable and new leases are not slowing down. We assume that the slowdown in the economy will lead to a moderation in the growth rate of the housing section to an annual rate of approximately 5.5% compared to 6.5% in the last year.
Private car section and its possession without the fuel Contributed about 0.4% to the increase in the rate of inflation (weight of the section 9.4%). We estimate that an increase in financing costs for the purchase of vehicles on the one hand and an improvement in the supply of vehicles on the other hand will cause a decrease in the contribution of this section to inflation.
The food section Contributed about 0.4% to the increase in the rate of inflation (weight of the section 14.6%). The food commodities index dropped from the peak by about 15%. However, due to a lag in food price increases in Israel compared to other countries, we assume that food prices will rise in the coming year at a rate similar to the increase in the last 12 months.
An increase in the price of electricity Contributed about 0.3% to the increase in the rate of inflation (weight of the section 2.2%). At the beginning of 2023, another price increase is expected.
All other sections in the index The prices, which weigh about 45%, contributed about 0.2% to descend at the rate of inflation in the last year. There is no reason to assume that their effect on inflation will change when growth in the economy is actually about to slow down.
In conclusion, The effect of most of the items that caused an increase in the rate of inflation in the last year is expected to become negative and lead to a decrease in the rate of inflation in the coming year.
We at Meitav Dash predict that the index for the month of December will increase by 0.4% and will be affected by the increase in fuel prices following the cancellation of the tax exemption. Food and housing prices are also expected to continue to rise.
The price index for the month of January is expected to decrease by 0.1% under the influence of the seasonal discounts in clothing prices. The February index is expected to increase by 0.1% and will be affected by the expected cancellation of the tax on sugary drinks and disposable utensils. The inflation forecast for the next 12 months is 2.8%.
A further rise in the inflation environment ahead of the Bank of Israel’s interest rate meeting in early January is expectedGod to support BDecision to increase by 0.5%.
In the current inflation expectations, which have dropped significantly in the last month, there is none at that point advantage distinct Lafik the shekels on the adjacent face.
| A decrease in apartment prices soon
The data continues to indicate a sharp decline in apartment purchases. According to the data of the Ministry of Finance, in October the amount of transactions decreased by 65% compared to last year and by 36% compared to September. Apartment prices still continued to rise in September, but the circumstances support their decline:
A decrease in sales occurs against the background of a record amount of apartments under construction, when the number of unsold apartments is increasing.
The amount of mortgages also fell sharply.
There is a long-term relationship between changes in apartment sales and changes in prices and it clearly indicates that prices are about to change direction.
The Ministry of Finance points to a sharp drop in the contractors’ cash flow, which dropped in October by about 66% in real terms compared to last year. An increase in financing costs on the one hand and a decrease in sales on the other hand are expected to pressure the contractors to lower prices.
The Ministry of Finance notes in its review that the data on apartment sales by housing developers and in particular the average number of months it takes to sell an old apartment may indicate a higher tendency of housing developers to compromise on the selling prices of their previous apartment.
| Fed forecast unlikely
Last week the central banks tried to convey a “hawk” message. The Fed didn’t quite make it. At most, he prevented a “rally” in the markets. Despite the increase in interest rate forecasts by the Fed, interest rate expectations embodied in contracts for the end of 2023 decreased in a weekly summary by about 0.15% to about 4.42% compared to 5.1% in the Fed’s forecast. Market forecasts for the end of 2024 are about 1% lower than the Fed’s forecast for an interest rate of 4.1%.
The markets also did not really “buy” the increase in the Fed’s inflation forecast. Implied inflation expectations in the bond market fell after the announcement of the interest rate decision, especially in the short term. However, the Fed’s forecasts for PCE inflation are simply not reasonable:
We will demonstrate this with the help of the forecast for PCE Core inflation, which is expected to reach 4.8% by the end of 2022. For this to happen, this index needs to increase cumulatively by 0.9% in the months of November-December. However, forecasters’ forecast for an increase in PCE Core in November stands at 0.2% and is quite safe after the release of the CPI for November. Thus for PCE Core to increase by 4.8% at the end of 2022, the December index needs to increase by 0.7%. In the last 40 years, the PCE Core Index has risen by 0.7% or more per month only twice. It is very likely that the index in December will increase by 0.2%-0.3% and then at the annual level PCE Core inflation will be 4.3% and not the 4.8% that appears in the Fed’s forecasts. The forecast for the normal PCE index for the end of the year is also highly biased upwards.
If at the end of the year PCE Core inflation will be 4.3% and not 4.8%, then the forecast for the end of 2023 should also drop from the 3.5% that appears in the Fed’s forecast to 3%. The path of inflation is significantly lower than what the Fed predicts should affect the path of interest rates.
| What prevents the Fed to stop interest rate increase?
How do the economic data compare with the Fed’s “hawkish” message?
The purchasing managers’ indices for the month of December point to a deterioration in the US, compared to an improvement in Europe. The indices in the US decreased in both the industry and services sectors.
Industrial production and retail sales data for November in the US were also lower than forecast.
Aside from the inflation data, the price index for the month of November was lower than forecasts, including the core index, for the second time in a row. The import price index continued to fall and its annual rate returned to normal levels. Inflation expectations of consumers in the New York Fed branch survey fell. More importantly, according to the Fed survey, business expectations for an increase in the price of the products or services they sell in the coming year continue to decline.
To be more relaxed, the Fed lacks clear signs of weakness in the labor market. Evidence of a certain weakening in expectations for the state of the labor market can be found in the survey of consumer expectations by the New York branch of the Fed. Also, the decrease in the proportion of employees who voluntarily leave their workplace predicts a moderation in the rate of wage increases. Small businesses also report a certain decrease in the difficulty of obtaining employees. However, overall, for the time being, there is not enough evidence for the central bank regarding the weakening of the labor market.
Another factor that may hinder the Fed is an easing of financial conditions. Neglecting a “hawk” position may be the opening shot for a surge in the financial markets.
| Fed interest rate is expected to stop below his forecast
We estimate that the Fed will raise interest rates by 0.25% at the next meeting (1/27) and stop. In light of the lower inflation trajectory than the Fed forecasts we presented earlier and the expected continued weakening of the economy, the conditions at the Fed meeting in the second half of March will not justify a continued interest rate increase in our estimation.
We will also note that, taking into account the shrinking of the Fed’s balance sheet, the “real” interest rate of the American central bank is higher than the stated one. According to the model published by the Fed branch in San Francisco, which tries to translate into the interest rate the totality of the Fed’s measures in the field of monetary policy (changes in the balance sheet, forward guidance, etc.), the Fed’s interest rate actually stands at 6.4%. We note that this is even before last week’s interest rate increase (the model is updated once a month).
The writer is chief economist of the Meitav Dash investment house. This analysis is intended for the purpose of providing information only, and in no way should it be considered an opinion, proposal, recommendation or consulting/marketing for the purchase and/or possession and/or sale of securities and/or the financial assets described therein. The information contained in this review does not claim to contain all the information needed by a potential investor and does not claim to be a complete analysis of all the facts and details contained therein. This review is not a substitute for investment advice/marketing that takes into account each person’s data and special needs. Meitav Dash Brokerage, and sister companies and other companies in the Meitav Dash Investments Ltd. group and/or interested parties to any of the companies listed above and their clients, may have an interest in the securities and/or financial assets included in this review.