March CPI Surprises With 0.5% Increase

This was the first positive CPI after four consecutive months of lower prices.

The March consumer price index rose 0.5%, the Central Bureau of Statistics announced on Tuesday morning. Economists were surprised, as prior forecasts were only in the 0% to 0.3% range.

This was the first positive CPI after four consecutive months of lower prices. The major factors in the rise in inflation were higher housing costs - up 1.6% last month - and a 3.6% rise in fruit and vegetable prices in March. Housing costs make up over 20% of the weighted index.

The last time the March CPI rose so sharply was back in 2002, when it also was up 0.5%. For the most affluent 20% of the population, inflation ran at the same 0.5% level, but for the poorest 20%, who spend a higher percentage of their incomes on food and other staples, inflation hit 0.7% in March.

The increase in housing prices contributed about 60% of the rise in the CPI, said Gil Neuberger, CEO of the Edmund De Rothschild Mutual Funds in Israel. "There were forecasts of a very moderate rise in the housing component, but the 1.6% increase was a surprise. The dollar rose in March by over 4% [against the shekel], and it turns out that despite the apparent disconnection between the dollar and housing prices, the rise in the dollar still has an affect. The changes in the other components were expected," said Neuberger.

Transportation costs were up 0.5% last month, and food prices increased 0.4%. On the down side were shoes and clothing, falling 3.9%.

The overall CPI is now down 0.1% so far in 2009, and without considering fruits and vegetables is down 0.2% - but without including housing costs inflation actually dropped 0.6% in the first three months of the year. Not including energy, the CPI is down 0.2%. Inflation for the past 12 months - March 2008 to March 2009 - was 3.6%.

"We are forecasting another high CPI in April, which is positive on a seasonable basis. It may be even higher than in March, but this is still not a serious change in the trend," added Neuberger.

The positive CPI after the four-month run of deflation is not expected to dramatically change the central bank's policies, said Neuberger. "The positive CPI slightly reduces the Bank of Israel's flexibility, but you should not draw any conclusions from a single month. If we see additional positive indexes in coming months, and the indexes are higher, that will reduce the Bank of Israel's flexibility to implement an expansionary monetary policy - but we are at very low interest rate levels and therefore the CPI will mostly influence the level of intervention in purchasing government bonds. I do not think the Bank of Israel will change its policy based on a single index," he added.

Ronen Menachem, the head of strategy and investments at Mizrahi Tefahot Bank, agrees that the governor of the Bank of Israel, Stanley Fischer, will not change interest rates later this month. Fischer will announce his decision on May rates on April 27. Menachem says the index shows a significant rise in basic inflation: Over the 12 months ending March 2009, the CPI without food and energy is up 4.6%, compared to only 4.1% for the 12 months ending in February. "These products have a 20% share of the CPI. Therefore, the rise in local prices continues to offset the drop in the prices of inputs overseas," Menachem added.

He said the dominance of the housing component in inflation continues, as without it the CPI rose only 0.5% in the last 12 months, though in March the rise in housing prices was less than the rise in the dollar.

Uriel Lynn, president of Israel Chambers of Commerce, said the unexpectedly high index for March was partly a result of seasonal increases, but does not reflect a rise in consumption - and should not be viewed as a sign of the beginning of an economic recovery.

The Manufacturers Association said the economic situation and rising unemployment will serve to keep inflation low, but there is a need to help the business sector survive the global recession by relieving the credit crunch immediately, and implementing other tools to stimulate economic growth.