Annual inflation back up to 4.1% as consumer goods costs climb

Prices of fresh produce, transportation, entertainment, rent increase; drop seen in costs for clothing, footwear, furniture

A shopper at a Rami Levy supermarket in Modi'in on February 1, 2022. (Yossi Aloni/Flash90/File)
A shopper at a Rami Levy supermarket in Modi'in on February 1, 2022. (Yossi Aloni/Flash90/File)

Israel’s annual inflation climbed back up to 4.1 percent in August, according to the latest figures published on Friday by Israel’s Central Bureau of Statistics (CBS), up from 3.3% in July and similar to June’s 4.2% rate, as consumer prices continued to stay above the central bank’s target range of between 1%-3%.

The consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, rose by 0.5% in August, according to the monthly report.

In August, increases were seen in the cost of fresh vegetables, which rose 1.9%, culture and entertainment costs were up 1.3%, transportation rose 1.8%, and housing was up 0.7%. These were offset by drops in the prices of fresh fruit, down by 3.6%, clothing and footwear down 2.5%, and furniture and household goods, which saw a decrease of 0.1%, according to the statistics bureau.

In the housing category, renters who were renewing a contract saw an increase in prices of about 3.8% in August. New tenants who were signing new leases saw an increase of about 8.4% compared to last year, according to the report.

A separate report by CBS focused solely on real estate transactions showed that housing prices decreased by 0.1% between June and July 2023 compared to May and June this year, but were up 3.2% from the corresponding period last year.

The Bank of Israel has sharply raised the interest rate — from 0.1% to 4.75% — over the past 16 months to battle mounting inflation.

Earlier this month, the Finance Ministry submitted a report to the Knesset that predicted that inflation would average 4.3% by the end of the year.

In the report submitted nearly two weeks ago, Finance Minister Bezalel Smotrich said Israel’s economy and finances were comparatively strong globally, but acknowledged that inflationary pressures have not eased as much as expected when the hardline coalition passed the state budget in May.

Meanwhile, political uncertainty surrounding the Israeli government’s judicial overhaul and the massive protests that have ensued have seen the shekel depreciate by more than 8% against the US dollar since the start of the year. The shekel was trading at NIS 3.82 per dollar on Friday, compared to NIS 3.45 per dollar when the budget was submitted and NIS 3.60 per dollar when it was passed.

In August, the Bank of Israel said that the uncertainty around the advancement of the proposed judicial shakeup was already having an impact on the economy reflected in the increase in the country’s risk premium, depreciation of the shekel, the decline in equity prices, and increased volatility in the foreign exchange market.

For now, the Bank of Israel sees the economy growing at a rate of 3% in each of the years 2023 and 2024. As the main risk to the forecast, the central bank cited a scenario in which the advancement of the legal and institutional changes leads to an increase in Israel’s risk premium, continued devaluation of the shekel, damage to exports, and a decline in local investments and demand for private consumption. Should this risk materialize, the central bank estimates that the damage to Israel’s GDP in each of the coming three years will be between 0.8% and 2.8%.

Bank of Israel governor Amir Yaron, who took up the post in 2018 and who may extend pending a government decision, has been critical of the advancement of the judicial overhaul in its current format and has warned about its economic costs. Back in July, Yaron cautioned that the advancement of the legal changes has led to an increase in the level of uncertainty in the economy, reflected in the “excess depreciation” of the shekel and the underperformance of the Israeli stock market versus global markets.

Last week Netanyahu reportedly met with a delegation from Moody’s Investors Service ahead of the rating agency’s update on Israel’s sovereign country rating, which is expected to be released in October. In July, Moody’s warned about “negative consequences” and “significant risk” for Israel’s economy and security situation following the passage of the first bill of the judicial overhaul.

Earlier this year, the agency lowered Israel’s credit outlook from “positive” to “stable,” citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary by siphoning off some of its powers.

Sharon Wrobel contributed to this report.

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