August Inflation Meets Expectations, But Housing Prices Continue to Climb

Israel's Consumer Price Index (CPI) rose by 0.7% in August, aligning with market forecasts and keeping the annual inflation rate at 1.5%. The Central Bureau of Statistics reported that the increase was primarily driven by rising prices in fresh vegetables (up 2.9%), transportation (up 2.7%), culture and entertainment (up 2.0%), and housing (up 0.6%). Conversely, notable price decreases were observed in fresh fruits (down 2.0%), clothing (down 0.8%), food (down 0.5%), and furniture and household equipment (down 0.3%).

The housing sector continues to be a significant concern, particularly for renters. Those renewing leases saw a 2.6% increase, while new renters faced a substantial 4.4% jump. The Bureau of Statistics noted that these figures reflect changes for households with renewed or new rental contracts, as most leases are not adjusted mid-year.

In parallel, the index of input prices for residential construction decreased by 0.1% in July. However, over the past 12 months, this index has risen by 3.5%, largely due to a 5.4% increase in labor costs within the construction industry.

The August inflation data provides crucial information for the Bank of Israel ahead of its October interest rate decision, as the annual inflation rate remains within the target range of 1%-3%. Yossi Menashe, co-founder and co-CEO of Altshuler Shaham Financial Services, commented that the "real test lies in the underlying components," emphasizing the need to monitor housing and services prices, and the extent to which import price increases are impacting domestic costs. He added that higher-than-expected inflation could limit the Bank of Israel's options for further rate cuts, while a lower-than-expected figure would support the view that the current inflation environment allows for additional easing.

Separately, the housing price index showed a second consecutive monthly increase in July, rising by 0.2% after a 0.1% increase in June. This rise was led by Tel Aviv (0.7%) and the central region (0.3%). However, on an annual basis, the housing price index is still down 1.2%, and has fallen 1% since the beginning of 2023. The index for new housing prices increased by 0.5% in July, but is down 0.8% year-on-year. The Bureau of Statistics also released its first quarterly data for second-hand home prices, which fell by 1.2% in the second quarter of 2023 compared to the first quarter, with Jerusalem experiencing the most significant drop (2.9%).