August Inflation Expected to Rise, Breaking Price Drop Trend

Israel's Consumer Price Index (CPI) for August is projected to increase by 1%, halting a recent trend of falling prices. This rise is primarily attributed to a significant jump in gasoline prices, which increased by 61 agorot per liter. The price of gasoline for the upcoming two months has been set at NIS 7.75 per liter. While a subsequent reduction in excise tax in early September will lower prices, this will only affect the September CPI, not the August figure. Analysts anticipate a slightly negative CPI for September, ranging from -0.1% to -0.2%.

Other components expected to contribute to the August CPI increase include transportation, leisure, communication, and costs associated with the return of students to school. The annual inflation rate is forecast to reach 1.8% following the August index, with the full year expected to close at a 2% price increase. This uptick in inflation is likely to prevent Bank of Israel Governor Professor Amir Yaron from further reducing the interest rate, which is expected to remain at 3.25% annually.

The governor's earlier decision to cut the interest rate by 0.25% at the beginning of the month was considered surprising given the ongoing security and budgetary challenges. Future interest rate decisions are scheduled for October 21 and November 23, with the latter being the final decision for 2026. Monetary policy in 2027 will be influenced by the actions of the new government and international factors, including the war in Iran and its impact on energy prices.

Global oil prices have risen to $107 per barrel amid fears of the Houthis closing the Bab al-Mandab strait. Consequently, the Israeli shekel has weakened against the dollar, reaching a two-month high of NIS 3.06. International interest rate policies, particularly those of the US Federal Reserve, will also play a role; a potential rise in global rates could make it harder for the Bank of Israel to lower its own rate. Chief economist at Leader Investment House, Jonathan Katz, noted that continued interest rate reductions are uncertain, citing political uncertainty and rising global yields impacting long-term indexed bonds, which still favor inflation-linked assets due to concerns about global commodity prices.