October Inflation Surprise: Israel's CPI Drops Unexpectedly, Prompting Policy Review
Translated & summarized from Calcalist by baba
Israel's Consumer Price Index unexpectedly dropped by 0.1% in October, pushing annual inflation to 1.1% and surprising economists. The decline was largely driven by lower prices for overseas travel and housing services. This development significantly increases the likelihood that the Bank of Israel will cut its benchmark interest rate at its next meeting on November 23, as inflation approaches the lower bound of the government's target.
The story in 5 lines · by baba
- Israel's October CPI fell 0.1%, surprising economists and lowering annual inflation to 1.1%.
- Inflation is now just 0.1% from the lower bound of the government's 1%-3% target.
- Overseas travel and housing costs were the main drivers of the unexpected price decrease.
- The slowdown suggests potential weakness in domestic demand despite a weaker shekel.
- A Bank of Israel interest rate cut on November 23 is now considered highly probable.
Israel's Consumer Price Index (CPI) unexpectedly fell by 0.1% in October, a significant deflationary surprise that has caught forecasters off guard and necessitates a reassessment of the price environment and monetary policy. The market had widely predicted a monthly increase of 0.3%. This decline pushed the annual inflation rate down to 1.1%, well below the expected 1.5% and the lowest since April 2021. Crucially, inflation is now just 0.1% away from the lower bound of the government's 1%-3% price stability target, raising concerns about the risk of inflation falling too low.
The primary drivers of the October decrease were significant price drops in overseas travel and flights, which fell by 5.1% and alone reduced the index by 0.23 percentage points. Owner-occupied housing services also contributed, falling 0.5% and shaving 0.085 percentage points off the index. Without these two components, the CPI would have risen by 0.22%.
Further analysis reveals that even after accounting for seasonal factors, the CPI decreased by 0.3% in October. Trend data from the Central Bureau of Statistics (CBS) indicates an annualized inflation rate of only 0.9% between July and October, with the index excluding housing showing a 0.3% annual decrease. These figures suggest the price moderation may not be a one-off event.
The unexpected inflation slowdown occurs despite factors that typically push prices upward, such as a weakening shekel and rising producer and construction input prices. The transmission of currency depreciation to consumer prices may be delayed, or importers and retailers might be absorbing some costs, indicating potentially weaker domestic demand than anticipated.
This inflation data significantly increases the likelihood of the Bank of Israel cutting its benchmark interest rate at its upcoming meeting on November 23. The current rate stands at 3.25%, with an annual inflation rate of 1.1% leaving a substantial real interest rate. While the bank may cite the volatility of the travel component and other risks like geopolitical developments, economists argue that the risk of overly restrictive monetary policy and inflation falling below the target now warrants serious consideration.
