Inflation seen rising above Bank of Israel target range

The Consumer Price Index (CPI) in Israel for May will be published tomorrow and the forecast is not optimistic. The analysts' consensus is that the CPI rose by 0.5%-0.6% in May bringing the rate of inflation over the past 12 months to 3.1%-3.2%. This would be the first time this year that inflation has risen back above the upper limited of 3% in the Bank of Israel annual target range.

This is a worrying trend that seems likely to continue. Analysts see inflation persisting at 3% and even above throughout 2024, and some of the more hawkish analysts even see inflation rising to 3.4%.

One of the items that might complicate the situation is travel abroad. Bank Hapoalim chief financial markets strategist Modi Shafrir said in his most recent survey, "There is a big question mark above the flights component, due to the fact that the measurement method was recently changed. There has usually been a decrease in May, but this time the uncertainty is great."

Shafrir added that further increases are expected in the prices of food, housing, education and even in clothing and footwear. The May index is seasonally high, according to him, but even in the forecasts for the June index, inflation remains above the stability target.

If in the first months of the war inflation decreased as a result of its effects, now the trend is reversed. Among the reasons for this, are shipping prices, which have jumped by dozens of percent in the last few weeks, and Shafrir said, have climbed by 74% since the beginning of May. This is the global average, and shipping prices to Israel have increased by a sharper rate.

Wages provoking inflation

Another factor provoking inflation is the tight job market and the rate of wage hikes. Leader Capital Markets wrote, "The average wage in the economy rose by 9% in April (from the previous year) and by 7.2% for Israeli employees. The lack of Palestinian workers puts upward pressure on wages, especially in the construction industry. In addition, there is an increase in wages in most sectors."

Leader continued, "The number of salaried jobs in the economy has decreased by 3% from April 2023 to April 2024, but for Israelis only (not including foreigners) the number fell by only 0.8%. Part of the increase in wages is due to 'excess' social security payments for reserve soldiers (above the basic salary). In April, the minimum wage increased by 5.5% and this directly affects about 20% of all employees in the economy."

What will the Bank of Israel do? An interest rate cut is not in sight. After the most recent decision, Governor, Prof. Amir Yaron, said that monetary policy is at a sufficiently restraining level for inflation. But since then inflation has increased, and at the same time the fiscal deficit is higher than expected.

Published by Globes, Israel business news - en.globes.co.il - on June 13, 2024.