September Inflation Index Expected to Drop, But Annual Rate May Rise

Israel's Central Bureau of Statistics is set to release the September Consumer Price Index (CPI) on Thursday, with forecasts predicting a slight decrease of 0.3%. This follows an unexpected positive surprise in August, when the index rose by only 0.7% instead of the anticipated 0.8%-1%, largely due to increased costs for flights, vacations, and fuel. Analysts at Meitav and Leader Capital Markets anticipate a correction in September, though the situation is complicated by the Jewish High Holidays (Tishrei) which typically boost demand for travel and food, while a reduction in fuel excise tax may help lower the index. Despite the expected monthly drop, the annual inflation rate is projected to climb from 1.5% to approximately 1.8%. This rise is attributed to a larger decrease of 0.6% recorded in September of the previous year; as that figure exits the 12-month calculation and is replaced by a smaller negative number, the annual rate increases. This phenomenon highlights that a monthly price decrease does not always translate to a lower annual inflation rate. The current inflation remains within the Bank of Israel's target range of 1%-3%.

The timing of the High Holidays this year, with Rosh Hashanah falling in early September and Sukkot later in the month, concentrated holiday-related spending, including travel and purchases, earlier than in the previous year when Sukkot occurred in October. While September typically sees a seasonal price moderation after the summer peak, the holidays may offset some of this effect. August's data showed significant increases in spending on foreign travel and domestic flights (9%), fuel (7.2%), and hotels (12%), which heavily influenced the index. September saw a 17% increase in Israelis traveling abroad compared to the previous year, suggesting sustained demand for flights.

A key factor expected to moderate the September index is the reduction in fuel excise tax. Although the price per liter of gasoline initially rose in early September, a tax cut implemented on September 7th lowered it by half a shekel for the remainder of the month. This reduction, however, stems from a fiscal decision rather than a global price decrease, and global energy market pressures persist. Analysts caution that tax cuts can lower the index short-term but do not necessarily indicate sustained price moderation, as a reversal is possible if taxes are reinstated or global prices rise.

Food prices will also be under scrutiny, with potential increases due to holiday demand, though supermarket promotions might offer some relief. Vegetable and fruit prices, influenced by seasonality and weather, are also a factor. Housing, particularly rent, remains a significant driver of inflation in Israel. In August, the housing component rose 0.6%, with rents for renewing contracts increasing by 2.6% and for new tenants by 4.4%. This persistent rise in housing costs contributes significantly to the overall inflation rate, even as other sectors show moderation.

Looking ahead, business sector inflation expectations for the coming year have fallen to 1.95%, the lowest since January 2022, and are within the Bank of Israel's target. Forecasts from Meitav and Leader Capital Markets predict annual inflation of 1.9% and 2.3% respectively. Despite moderating inflation, strong domestic demand, with private consumption growing over 5% annually, may reduce the urgency for further interest rate cuts by the Bank of Israel. The next interest rate decision is scheduled for October 21st. While another negative CPI reading could support further monetary easing, its impact may depend on whether the price decreases are broad-based or concentrated in specific sectors like fuel and flights, with rising rents and services potentially influencing future rate decisions.