Israeli inflation picks up more than forecast as travel costs and home prices soar
Consumer prices accelerated to 3.6% in August, the highest level since October, reducing the odds that the central bank will cut high borrowing costs in the coming months
Sharon Wrobel is a tech reporter for The Times of Israel.
Israeli inflation in August quickened at a much faster pace than forecast, led by an increase in the costs of fresh produce and housing prices, along with higher foreign travel costs, data released by the Central Bureau of Statistics showed on Monday.
Annual inflation over the past 12 months accelerated to 3.6%, the highest level since October. The rate increased from 3.2% in July and 2.9% in June, and is for the second month above the government’s annual target range of 1% to 3%.
On a monthly basis, the consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, rose by 0.9% in August, above the average range of analysts’ expectations of between 0.5% and 0.6%.
Mizrahi Tefahot Bank chief strategist Yonnie Fanning described the CPI index as “unusually high, from a historical point of view, which pushes inflation far above the target range of the Bank of Israel.”
“The effects of the war on the economy in general and the CPI index in particular continue to be evident,” said Fanning. “Flight prices, which have risen sharply this month, are expected to continue to affect at least the upcoming indices.”
In August, price increases were seen in the costs of fresh vegetables, which jumped 13.2%, led by a surge of 37.3% in the price of tomatoes. Transportation costs were up 2.8%, housing rose 0.6%, and culture and entertainment edged up 0.5%, according to the statistics bureau.
As many airlines stopped flying to Israel due to the heightened security situation, the cost of foreign travel in August jumped 22.1%.
Last month’s price increases were offset by declines of 1.1% in the cost of clothing and footwear and a 5.9% drop in refined petroleum products.
Fanning expects the inflation rate to remain well above the 3% threshold in the coming months in light of the shortage of Palestinian workers in the construction and agriculture sectors due to the ongoing war with Hamas, and the expected increase in the value-added-tax rate in January.
In the real estate market, rents on renewal of contracts rose 2.6% last month and rents on contracts for new tenants increased 5.3%.
The specter of a housing shortage at the same time as a slowdown in building starts, due to a shortage in Palestinian construction workers, is behind a renewed rise in house prices in recent months, after they declined from mid-2022 and for most of 2023, during a surge in interest rates.
Data on the surprise uptick in inflation comes as Bank of Israel governor Amir Yaron in recent weeks expressed concern over the government’s management of its expansionary fiscal policy to fund growing defense and civilian expenditure during the ongoing war in Gaza.
Yaron warned in late August that uncertainty over the state’s finances and the implementation of adjustments required to reduce the growing deficit is liable to weigh on the return of inflation to its annual target range of 1% and 3%, and in turn, is likely to keep borrowing costs high for longer.
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 Hamas war, while the inflation environment was easing. Since then, the central bank has left interest rates unchanged at 4.5%, as inflation has been picking up gradually and geopolitical tensions heightened.
“Inflation in Israel is raising its head and this is very troubling especially given the irresponsible fiscal conduct by the Israeli government,” said Dror Ohev Zion, founder and CEO of residential project marketing and sales agency Dara. “It is very unlikely that we will see the central bank lowering interest rates in the coming months and this has a negative impact on businesses in general, on the real estate industry and households.”
“Despite the current interest rate level, we see the trend in the residential real estate market continuing to be characterized by high demand and decreasing supply, alongside higher construction costs which in turn will continue to drive price increases,” Ohev Zion added.
