October Inflation Falls Unexpectedly, Raising Questions for Bank of Israel
Translated & summarized from Globes by baba
Israel's consumer price index unexpectedly fell 0.1% in October, with annual inflation at 1.1%, surprising economists and complicating the Bank of Israel's upcoming interest rate decision. The drop was largely driven by cheaper flights, despite a weakening shekel. The central bank is now considering whether the low inflation signals a lasting trend or if currency depreciation will impact prices later, potentially influencing a rate cut on November 23.
The story in 5 lines · by baba
- Israel's October CPI fell 0.1%, with annual inflation at 1.1%, below expectations.
- Economists were surprised by the inflation data, which precedes a Bank of Israel rate decision.
- Lower prices for flights and overseas travel significantly contributed to the index's decline.
- The Israeli shekel has weakened against the dollar, but its impact on prices is delayed.
- Rental prices continue to rise, contrasting with the overall inflation slowdown.
Israel's consumer price index (CPI) unexpectedly fell by 0.1% in October, bringing the annual inflation rate down to 1.1%, just above the lower bound of the Bank of Israel's target range. This figure surprised economists, who had predicted a 0.2%-0.3% increase, and comes less than two weeks before the central bank's next interest rate decision on November 23.
The inflation data contrasts sharply with the recent weakening of the Israeli shekel against the US dollar, which rose from approximately 3.09 shekels in mid-October to around 3.22 shekels currently. Typically, a weaker currency makes imports more expensive and can fuel inflation. However, Ronen Menachem, Chief Markets Economist at Mizrahi Tefahot Bank, explained that the impact of exchange rates on prices is not immediate, being gradual and partial. He noted that not all shekel depreciation directly translates to consumer prices, and the effect depends on the economic situation and whether the weakening trend continues.
The primary driver of the CPI decrease was a 5.1% drop in prices for overseas travel and domestic flights, which alone reduced the index by about 0.23 percentage points. Without this factor, the index would have shown a slight increase. Menachem suggested that the reduced impact of holidays in October might have led to milder-than-expected price increases in seasonal items. He also highlighted that the travel and leisure sector is particularly volatile.
Beyond flights, broader price moderation was observed. The seasonally adjusted index declined by 0.3% in October, and prices excluding housing dropped by 0.1% over the past twelve months, indicating a relatively widespread slowdown in price increases. This contrasts with continued rises in the rental market, where renewed contracts saw a 2.8% increase and new contracts a 5.5% rise, while apartment prices themselves fell by 1.5% annually.
The unexpected inflation data complicates the Bank of Israel's upcoming interest rate decision. While the market consensus had anticipated the rate remaining at 3.25%, Menachem suggested the new inflation figures warrant reconsideration. He stated that with annual inflation at only 1.1%, the central bank's considerations have shifted, and a rate cut, previously not widely expected, cannot be ruled out. However, factors such as a potential US interest rate hike in December, the ongoing shekel depreciation, and political and budget uncertainties continue to influence the decision.
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