August Inflation Expected to Spike Due to Travel, Fuel Costs

Israel's Central Bureau of Statistics is set to release the August consumer price index (CPI) on Tuesday, with market analysts predicting a significant increase of 0.8% to 1%. This monthly rise is expected to interrupt a period of moderate inflation that had brought the annual rate down to its lowest level since 2021. The primary drivers for this increase are anticipated to be a 3.9% jump in transportation costs, largely due to a 61 agorot per liter increase in 95-octane gasoline prices at the start of August, and a rise of over 8% in prices for international flights and accommodations, attributed to high demand during the summer vacation period. Family leisure activities and summer camps are also expected to see a roughly 1% price increase.

Other contributing factors include a projected 0.8% rise in housing costs, primarily reflecting rental prices, and a 0.3% increase in food and fresh produce prices. The sharp monthly increase is amplified by a low base effect from previous months; June's CPI was unchanged, and July saw only a 0.3% rise, resulting in a 1.5% annual inflation rate. Even with the expected August spike, the annual inflation rate is projected to climb only to between 1.6% and 1.8%, still below the Bank of Israel's target range and significantly lower than rates seen in 2022 and 2023. The annual figure is also tempered by a 0.7% CPI increase in August of the previous year.

Looking ahead, September is expected to see a reversal, with analysts forecasting a negative CPI of around -0.2%. This is due to the seasonal drop in flight prices after the summer holidays and a decrease in fuel prices at the beginning of September. Inflation is anticipated to stabilize around 2% by year-end. The upcoming CPI report is seen as a reflection of August's specific conditions rather than a new trend. However, it may influence future interest rate decisions. The Bank of Israel recently cut its benchmark interest rate by a quarter percentage point to 3.25%, the third consecutive cut, bringing the prime lending rate to 4.75%. The next rate decision is scheduled for October 21st, and economists believe a further cut is less likely, as the Monetary Committee considers broader economic factors beyond a single month's data.

Factors that could complicate the inflation outlook include rising global oil prices due to tensions in the Strait of Hormuz, which can impact transportation, production, and consumer goods. Additionally, a weakening shekel, which makes imports more expensive, and potential interest rate hikes in major economies could also influence inflation and the central bank's decisions, potentially narrowing the interest rate differential that affects the shekel's value.