Inflation edges higher as housing costs and travel prices rise

Consumer prices rose by an annual 2.7% in March, from 2.5% in February, reducing the odds that the central bank will lower already high borrowing costs for consumers in May

Sharon Wrobel is a tech reporter for The Times of Israel.

The busy aisles at a Rami Levy supermarket in Pardes Hannah-Karkur, on October 10, 2023. (Gavriel Fiske/ Times of Israel)
The busy aisles at a Rami Levy supermarket in Pardes Hannah-Karkur, on October 10, 2023. (Gavriel Fiske/ Times of Israel)

Consumer prices in Israel in March quickened at a faster pace than forecast, led by an increase in housing prices and higher travel costs, data released by the Central Bureau of Statistics showed on Monday.

The consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, increased by 0.6% in March slightly above analysts’ expectations of between 0.4% to 0.5%. That is after the February CPI monthly figure of 0.4%

The March print brings annual inflation over the past 12 months to 2.7%, up from 2.5% in February, and 2.6% in January. The government’s annual target range of inflation is between 1% to 3%.

Data on the surprise uptick in inflation comes after Bank of Israel governor Amir Yaron warned last week about risks that could fuel price pressures and keep borrowing costs high for longer. Yaron cited higher government spending due to the developments of the Hamas war in Gaza, a weaker shekel, and global oil prices, among the risks putting upward pressure on inflation.

Back in January, the Bank of Israel cut its base lending rate for the first time in almost four years, to support households and businesses as the economy was getting battered, due to the ongoing war, and as the inflation environment was easing.

Since then, the central bank has left interest rates unchanged at 4.5%. Yaron said last week that as long as regional tensions stabilize, and inflationary pressures ease, the central bank could return to a path of lowering borrowing costs.

New buildings at a construction site in the West Bank settlement of Maale Adumim, February 29, 2024. (Menahem Kahana/ AFP)

“The consumer price index data shows once again that the risk of inflation is on the rise, which is what the Bank of Israel emphasized in recent interest rate decisions and is one of its key considerations in the interest rate path,” said Israel Discount Bank chief economist Nira Shamir. “Recent market forecasts are now giving a very low probability of an interest rate cut at the end of May.”

In March, price increases were seen in the cost of cigarettes, which were up 7.1%, clothing and footwear rose 2%, culture and entertainment increased 1.5%, and housing prices edged up 0.6%, according to the statistics bureau. Travel and vacation costs in Israel jumped about 7% in March, foreign travel prices rose 1.3%, and painting and plastering services soared 7%.

These were offset by notable declines in the price of fresh vegetables and fruits, which fell 3%.

Looking ahead, on May 1, the prices of price-controlled dairy products are set to climb by an average of 4.48%, the Agriculture Ministry announced on Monday. The price of a one liter 3% milk bottle will go up from NIS 5.94 ($1.58) to NIS 6.21 and the cost of one carton of 1% milk will rise from NIS 6.41 to NIS 6.7.

Housing market heating up

In the real estate market, rents on renewal of contracts rose 2.7% in March, and rents on contracts for new tenants went up 2.6%, according to the statistics bureau.

Housing prices increased by 1% in the months of January to February, compared to the months of December 2023 to January 2024.

People shop for dairy products at the Shufersal Deal supermarket in Katzrin, on November 28, 2022. (Michael Giladi/Flash90/File)

“We expect the Bank of Israel to act and lower interest rates during the year, as long as inflation remains within the target range,” said Dror Ohev Zion, founder and CEO of residential project marketing and sales agency Dara. “The housing price index rose and there is an increase in the sale of new apartments, which together show a developing trend in the housing market: growing demand, low supply, and prices that are on a clear upward direction.”

“We expect that this trend will gain momentum during the year,” he projected.

The specter of a housing shortage at the same time as a slowdown in building starts, due to a shortage in Palestinian construction workers during the ongoing war, is behind a renewed rise in house prices, after they declined from mid-2022 and for most of 2023, during a surge in interest rates.

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