CPI Rise of 1.1% for July Exceeds Expectations

Price increases fuel inflationary fears.

The Consumer Price Index for July rose by 1.1%, exceeding economists' expectations of a 0.7%-1.0% increase. The main reasons for the rise are the increase in VAT, from 15.5% to 16.5%, and the recently imposed "drought tax" - otherwise known as a hike in water fees.

The high index is strengthening analysts' assessments that Bank of Israel Governor Stanley Fischer will have no choice but to announce a rise in interest rates - from 0.50% to 0.75%, or even 1.0% - next Monday.

According to the Central Bureau of Statistics, which issued the CPI figures on Friday, the cost of water for home consumption - the stuff flowing through the pipes - jumped by an unprecedented 26.7% last month. Other major contributors to the inflationary trend include domestic and foreign vacations, the cost of which rose by 11.3%; a 4.2% combined rise in the price of fruit and vegetables, with the former rising by 3.4% and the latter by 8.4%; and a 3.4% increase in gasoline and motor oil prices. The cost of cars, by the way, climbed by 2.3% in July.

At 0.9% the increase in food prices was significant. Major contributors to that category, in addition to fresh produce, included a 4.2% rise in workplace meals and the increase, by 2.6% and 2.5%, respectively, of prices of bread and chicken.

With regard to fruit prices, mangoes and lemons, both out of season, were 31.6% and 23.7% percent dearer in July. Lack of seasonality can also explain the 39.5% rise in beet prices, but not the 26.5% jump in zucchini prices.

As for the significance of the high CPI, there is no consensus. Uriel Lynn, president of the Federation of Israeli Chambers of Commerce, said that Fischer will be faced with a difficult decision next week. On one hand, Lynn said, the high CPI points to strong inflationary pressures that could destabilize Israel's economy. On the other hand, putting up interest rates could lead to a further appreciation of the shekel against world currencies, which would harm Israeli exports and increase credit costs for the country's business sector.

The chairman of the economics committee of the Manufacturers Association of Israel, Ori Yehudai, says last month's high CPI is primarily a reflection of one-time price increases caused by the cabinet's tax decisions as well as the 0.4% hike in the housing index.