Israeli Consumer Prices Take Surprise Turn Lower as GDP Is Revised Upward

June index was lowest since 1972 and left inflation for last 12 months at negative 0.2%, far away from government's target range, causing economists to push back the date of a Bank of Israel interest rate change until as late as 2019

Bank of Israel chief Karnit Flug presenting the new 200-shekel bill, December 2015.
Emil Salman

Israeli consumer prices took an unexpected turn lower in June after four months on the rise, as prices for fresh produce and apparel plunged, the Central Bureau of Statistics said on Friday. Housing prices rose a slight 0.1%.

The June index was lowest since 1972 and left inflation for the last 12 months at a negative 0.2%, far away from the government’s target range of 1% to 3%, causing economists to push back the date of a Bank of Israel interest rate change until as late as 2019.

Meanwhile, the CBS said on Sunday that Israel’s economy grew at an annualized 1.4% in the first quarter, slightly higher than previously thought due to an improvement in exports, but still its slowest pace in almost two years. Fourth-quarter growth was revised to an annualized 4.7% from 4.6%.

Down again
Israeli inflation*

In the first quarter, exports grew 8.7%, compared with 7.8% in the prior estimate. Consumer spending dipped 1.1%, while investment in fixed assets fell by 3.4%.

David Reznik, head of economics at Leumi Capital Markets, said inflation would remain negative until the start of 2018 and that the Consumer Price Index for 2017 would be about zero or perhaps in the negative. That, combined with the fact that declining prices encompass such a broad range of goods and services, spells continued low interest rates for the foreseeable future.

“The fact that the shekel is trading at record levels and that much of the effects of the appreciation will only percolate through the economy over the next few months leaves no other conclusion than that there no change in the Bank of Israel’s highly expansionary monetary policy on the horizon,” Reznik said. 

The shekel is close to its strongest in three years against the dollar, although the greenback made some gains last week. On Friday, its Bank of Israel rate was set at 3.538, a gain of 0.1%.

Jonathan Katz, chief economist at Leader Capital Markets, said it was unlikely that the central bank would begin to raise interest rates – now at a historical low of 0.1% – before the start of 2019.

Only last week Bank of Israel economists forecast the benchmark interest rate would remain at 0.1% through the first quarter of 2018, then rise to 0.25% in the second quarter and reach 0.5% at the end of next year.

Citing expectations that exports are likely to improve as global trade strengthens, the Bank of Israel raised its economic growth estimate for 2017 last week to 3.4% from a previous 2.8% and left its 2018 forecast unchanged at 3.3%. But Reznik said the rosy growth outlook would do little to alter the central bank’s monetary stance, which is focused on inflation.

The decline in the June CPI was led by an 8.7% drop in fresh produce prices and a 5.7% drop in prices for apparel. There was also a decline for water and sewerage prices (10.4%) and shoes (3.8%) while prices for milk and dairy products climbed 1.5%.

The 0.1% rise in home prices for April and May brings the rise in prices in the past six months to just 0.9%, although a spike in prices in the previous months means that on a year on year basis, the rise was 4.5%.

Nevertheless, the CBS statistics are preliminary and experience shows that the final figure is usually revised higher.