A rendering of housing units.
A rendering of housing units.
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Haaretz
Housing prices continue to climb. Click to enlarge. Photo by Haaretz

July inflation was only 0.1%, in line with expectations of most analysts. The real news was a 1% jump in the housing portion of the July Consumer Price Index, released by the Central Bureau of Statistics yeDsterday.

The low CPI reflects a continued economic slowdown as well as a drop in demand and less purchasing power for the public - similar to previous months. July inflation has been high in recent years, usually between 0.5% and 1.1%. Last year was an exception with a negative CPI for July, but this was the result of last summer's social protests against the high cost of living.

As for so-called core inflation: The index without housing costs actually fell last month by 0.2%, while if fuel costs were excluded the CPI would have risen 0.2%. The index has risen 1.1% since the beginning of the year and 1.4% over the past 12 months. The government's inflation target for 2012 is in the 1% to 3% range, putting present inflation toward the lower end of this range. Inflation for the April to July period reflects a 0.9% annual pace.

Other components of the index that rose included fresh vegetables, up 3.7%; health services, up 0.9%; and transportation, up 0.7%. Among those items that went down in price last month were clothing and shoes, down 8.3%; communications, down 0.8%; furniture and household goods, down 0.7%; and food, which cost 0.6% less last month.

The July index was also affected by the public's fears of the political and security situation, as well as the ongoing economic crisis in Europe.

Seasonable influences also clearly stood out in last month's inflation figures, especially in such items as clothes, fruits and vegetables. Lower prices for communications services, in particular for cellular phone costs due to increased competition, showed their effect. In addition, lower fuel prices, which are little affected by local events, helped keep inflation low.

July inflation would have been even lower if not for higher taxes on beer and cigarettes, as well as seasonal increases in vacation costs and the higher summer prices for trips abroad. Education, culture and entertainment costs rose 0.3%.

The low CPI will influence the Bank of Israel's decision on further interest rate cuts, possibly as soon as September - especially after the government took steps to reduce the budget deficit with recent tax hikes and spending cuts. The governor of the central bank, Stanley Fischer, seems to be satisfied with these initial steps and many forecast further interest rate cuts soon. However, rising housing prices, historically low mortgage interest rates and record high mortgage loans all expose the central bank to criticism that it is fueling rising housing prices - and this may influence Fischer to wait before cutting interest rates again.

Most analysts expect Fischer to lower rates from the present 2.25% to 2% for September, after he lowered August rates by 0.25%.

A number of specific items showed big swings last month: Manufactured foodstuffs fell 4% and cereals dropped 4.3% in price. But chocolate prices rose 2.1% and fruits and vegetables were 1.3% higher, mostly due to the summer weather. Cauliflower rose 15% in price, cucumbers were up 14.2% and cabbage 13.6%. Tomatoes went up 6% in price. Lemons were 30% more expensive. But a number of fresh fruits were much cheaper as the harvests rolled in: Grapes fell 21% and plums 17.1%.