Experts Warn of Possible Surprises in Israel's July Inflation Data Amid Mixed Economic Signals

Israel's Consumer Price Index (CPI) for July is set to be released tomorrow, with market forecasts predicting a modest increase of 0.2-0.3 percent. This would reduce the annual inflation rate from 1.6% to 1.4%, approaching the lower bound of the Bank of Israel's target range of 1%. Despite this, economists caution against relying solely on headline figures, emphasizing the need to analyze underlying factors and volatility.

Ronen Menachem, Chief Economist at Mizrahi Tefahot Bank, highlighted the complexity of forecasting inflation due to fluctuating oil prices, which recently reversed course and rose amid ongoing Middle East tensions. He noted that oil, a key supply-side factor, influences consumer demand for goods and services, complicating monthly CPI predictions. Menachem also pointed to the Producer Price Index as a more direct indicator of supply-side cost pressures that could affect consumer prices in the near term.

Seasonal factors such as travel and tourism costs, which have historically caused CPI deviations, remain relevant. Additionally, housing costs, which constitute over a quarter of the CPI, have been pushing inflation upward. Rental prices, particularly turnover rents, have surged by 5-6% monthly, making it difficult for housing inflation to ease soon. The recent 3% depreciation of the shekel against the dollar in July may also exert upward pressure on prices.

These conflicting trends create uncertainty about the inflation trajectory. While recent months saw inflation surprises mostly below expectations, June's data unexpectedly rose. August's CPI is forecasted to increase by 0.9%, potentially raising the annual inflation rate again. The Bank of Israel had projected two interest rate cuts by mid-next year, but Menachem expressed doubt about such moves in the upcoming September decision.

Jonathan Katz, Chief Economist at Leader Investment House, echoed the view of mixed signals: low inflation expectations and industrial slowdown due to currency appreciation support rate cuts, whereas a near-full economic reopening and labor shortages argue for cautious monetary policy. The July business trends survey by the Central Bureau of Statistics showed inflation expectations at their lowest since 2022. Meitav Investment House's inflation model, excluding housing, also indicates continued easing.

Overall, experts urge careful monitoring of inflation components and caution against premature conclusions, given the volatile economic environment and upcoming data releases.