The figures released by the Central Bureau of Statistics on Friday show inflation over the past twelve months falling to a rate of 5%. On the face of it, this is a positive development, and Minister of Finance Bezalel Smotrich even declared that inflation was on the way down and that "the light can be seen at the end of the tunnel."
A closer look at the figures themselves reveals that we are still a long way from moderation in the inflation rate, certainly as far as core inflation is concerned, that is, excluding energy prices and prices of fresh produce, which are subject to high volatility. In fact, core inflation in Israel rose in March back to its highest level in the current cycle, and is running at an annual rate of 5.2%.
Core inflation is calculated by economists on the basis of the figures supplied by the Central Bureau of Statistics for the various items that make up the Consumer Price Index. It excludes the most volatile items. Prices in areas such as education, healthcare, housing, and transport do not necessarily fall when the general Consumer Price Index falls, and these areas need to be examined separately.
Why then did core inflation rise? Among other things, prices of fresh fish were 3.4% higher in March than a year previously, meat prices were 6.9% higher, and prices of matzot were more than 20% higher.
According to Bank Hapoalim financial markets chief strategist Modi Shafrir, rises in food prices stem from rises in the prices of inputs for those products. "We are currently seeing food prices rising after the retail chains absorbed the rises in production inputs while they were under public scrutiny and were subject to protests against price rises," he says.
Now, Shafrir says, public attention has shifted to other matters, while prices traditionally rise during the Passover period, and the retailers are passing on production costs increases to the consumer.
Car prices offset rises
An further interesting point hidden in the details of the Consumer Price Index is that for the first time since May 2022 prices of used cars in Israel have turned downwards, falling 1.1% in March. New car prices have not risen at all in the past few months.
The fall in vehicle prices is not specific to Israel. In the US, for example, last week’s inflation figures indicated a further decline in prices of used cars. Vehicle manufacturers have apparently been trying to make up the shortfall in supply that arose two years ago when the Covid-19 pandemic broke out and worsened after the Russian invasion of Ukraine in February last year, and are now cutting prices.
The Manheim Used Vehicle Value Index, which tracks prices of used vehicles sold at its US wholesale auctions, has however recently risen sharply, indicating that the trend of declining prices is about to stop, at least in the US at this stage.
"Inflation at 3% a year from now"
Despite the jump in core inflation, Leader Capital Markets chief strategist Jonathan Katz remains optimistic on this front. "We currently see inflation at 3% a year from now. For several months we have been of the view that, looking twelve months ahead, most of the macro factors tend towards moderation of inflation."
This view does of course come with reservations. Katz says that inflation could change in accordance with shekel exchange rates, which represent "the great unknown" in projections for inflation in Israel.
Published by Globes, Israel business news - en.globes.co.il - on April 17, 2023.
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