Israel's Inflation Hits Lowest Level Since 2021 Despite Ongoing War
In July, Israel's consumer price index rose by 0.3%, bringing the annual inflation rate down to 1.5%, the lowest since May 2021. This marks a significant drop from July 2023, when inflation stood at 3.1%, above the government's target range of 1% to 3%. Remarkably, this disinflation is occurring amid an ongoing war, defying typical economic patterns where conflicts usually drive inflation higher due to supply disruptions, increased public spending, currency depreciation, and risk premiums.
Several factors have insulated Israel's economy from inflationary pressures commonly associated with war. The country's five-year CDS spread, indicating debt repayment risk, remains low at 56 points, only slightly above pre-October conflict levels. The shekel is stable against the dollar, trading below 3 shekels per dollar, and local natural gas supplies have shielded the economy from global energy shocks linked to regional tensions with Iran. Additionally, recent months have seen relative calm on the military front.
The July inflation increase is primarily attributed to a 7.5% rise in travel expenses, including both international flights and domestic travel, contributing 0.32 percentage points to the index. Seasonal factors related to summer vacations also pushed up accommodation, leisure, and tourism costs by 4.1%. Excluding these seasonal effects, the index rose by only 0.1%. Inflationary pressures remain concentrated in the services sector rather than tradable goods, with food prices stable and home furnishings declining by 0.7%. However, some service categories continue to rise, including culture and entertainment (up 1.1%), hotels and lodging (4.5%), transportation services (2%), and housing-related expenses such as taxes and insurance (2.1%). Housing costs themselves increased by 0.7% in July, with rental contracts renewing at a 2.6% annual increase and tenant turnover rents rising 4.7%.
The Bank of Israel's conservative monetary policy has been effective, with at least half of the 115 consumer price index components declining in July. The central bank has cut interest rates three times this year, bringing the rate to 3.5%, and forecasts inflation of 1.8% for 2026 and 2027 with a projected rate of 3% in one year. This contrasts with the United States, where inflation was 3.4% in July and the Federal Reserve has kept rates unchanged for five consecutive meetings. The July inflation data supports the Bank of Israel's plan to continue monetary easing and further reduce interest rates in the near term.
