Inflation edges higher, bolstered by uptick in housing prices

In June, annual inflation rose to 2.9%, reaching the upper range of the government’s target, reducing the odds that high borrowing costs will be lowered in coming months

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

Illustrative. A man looks at dairy products while shopping at a Rami Levy supermarket. (Nati Shohat/Flash90)
Illustrative. A man looks at dairy products while shopping at a Rami Levy supermarket. (Nati Shohat/Flash90)

Israeli inflation quickened in June, led by an increase in housing prices, culture and entertainment costs, and higher travel prices, data released by the Central Bureau of Statistics showed on Monday.

Annual inflation over the past 12 months rose to 2.9 percent and was up from 2.8% in May and 2.5% in February. The government’s annual target range of inflation is between 1% to 3%.

On a monthly basis, the consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, increased by 0.1% in June from May, in line with analysts’ expectations of between 0% and 0.1%. That is after the May CPI monthly figure edged up 0.2%.

In June, price increases were seen in the cost of culture and entertainment, which jumped 1.2%. Housing prices were up 0.5% and food prices rose 0.3%, according to the statistics bureau. Foreign travel and domestic flight costs rose 1.3%. These were offset by notable declines in the price of fresh vegetables and fruits, which fell 2.5%, and transport and communications costs declined 0.4%.

In the real estate market, rents on renewal of contracts advanced 2.2% in June, and rents on contracts for new tenants soared 4.2%.

The specter of a housing shortage amid a slowdown in building starts due to a shortage in Palestinian construction workers during the ongoing war with the Hamas terror group, is behind a renewed rise in house prices in recent months, after they declined from mid-2022 and for most of 2023, due to a surge in interest rates.

Israelis protest against the soaring housing prices in Tel Aviv and cost of living, on July 2, 2022. (Tomer Neuberg/ Flash 90)

Home prices in April and May 2024 rose 0.8% compared to the two previous months of the year, data by the statistic bureau showed.

“Despite the war, the trend of price increases in the housing market since the beginning of the year has continued, along with an increase in the rate of real estate transactions,” said Dror Ohev Zion, founder and CEO of residential project marketing and sales agency Dara. “Since the beginning of the year, the housing price index rose by 3.4% and we project that even at the current interest rate environment, the volume of sales in the market will not weaken.”

“The trend in the residential real estate market will continue to be characterized by high demand, relatively low supply, and rising prices,” Ohev Zion added.

Data on further uptick in inflation comes after the Bank of Israel’s research department last week revised its outlook for the economy, as it sees Israel bracing for a longer and more intense war than previously expected. The central bank cautioned about risks of inflation quickening and slower economic growth for this year and in 2025, lowering the odds for cutting high borrowing costs in the coming months.

The Bank of Israel slashed the growth outlook for the economy citing a “high level” of geopolitical uncertainty and fears of an increased risk of an escalation with Iran-backed Hezbollah on the northern border.

An escalation of the ongoing war to the northern front with Hezbollah in Lebanon would incur additional defense and civilian expenditure leading to a higher fiscal deficit and a weaker shekel, all of which would fuel inflationary pressure.

A woman shops at a street market in the center of Tel Aviv on December 1, 2021. (MENAHEM KAHANA / AFP)

The central bank now expects inflation in 2024 to be 3%, compared with 2.7% in its forecast in April. Inflation in 2025 is expected to be 2.8%, compared with 2.3% in the April forecast.

“Inflation is a process that negatively impacts the economy and growth, and makes financial conduct difficult for the economy overall, and particularly for weaker population groups,” Bank of Israel governor Amir Yaron said at a press briefing last week.

Therefore, the central bank decided to hold the benchmark interest rate at 4.5% for a fourth consecutive meeting. In January, it lowered the base lending rate for the first time in almost four years by 25 basis points, from 4.75%, to support households and businesses as the economy was getting battered due to the Hamas war, and as the inflation environment was easing.

Yaron warned last week about risks that could fuel price pressures and keep borrowing costs high for longer, including increased war spending, a weaker shekel, the housing market, fiscal developments, and global oil prices.

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