Surprise for August: Prices Up 0.5% / As Housing Costs Rise, CPI Tops Forecasts

Inflation is rearing its head, thanks in no small part to housing. The consumer price index outpaced forecasts and increased 0.5% in August, the Central Bureau of Statistics announced yesterday.

The inflation rate is historically quite high in August. Six out of 11 economists who took part in a Bloomberg survey predicted it would increase by 0.3%, while another three said 0.4%.

Since the beginning of the year the CPI has increased 1.6%, and in the past 12 months it's up 1.8%. This is well within the price-stability range set by the government of 1% to 3% a year.

Without energy prices, inflation was 0.6% for August; without vegetables it was 0.4% and without housing it was 0.1%.

Housing is a major component of the increase in annual terms - the CPI increased at a 1.1% annualized pace between May and August, but if housing is removed from the index, prices have actually fallen 0.6%. If fruit and vegetables are also removed, prices have fallen 1.2%.

The price index of inputs in residential building increased 0.5%, and is up 2.7% for the year so far.

Inflation is one of the main factors the Bank of Israel takes into account when considering whether to change interest rates. Bank of Israel Governor Stanley Fischer has said he is planning to slowly raise interest rates to return them to a "normal" level; the current overnight interbank lending rate of 1.75% is low in historical terms, even though it's not as low as last year, when it hit a nadir of 0.5%.

The CPI rise for August increased expectations that Fischer would raise rates to 2% for October.

Manufacturers are not keen on any interest-rate increases, which they say would create demand for the shekel, pushing up the exchange rate in light of the low interest rates in other countries.

Clal Finance economist Amir Kahanovich noted that while the August CPI was higher than expected, one-time price cuts over the coming months are expected to keep the CPI relatively low, rising only another 0.6% by next March.

The prices that increased the sharpest in August included fruit and vegetables (5.2% ), housing (1.7% ), culture and entertainment (1.7% ) and food (0.7% ). Hotel prices rose 13.9%.

Particularly sharp drops were recorded in clothing and shoes (5.3% ), furniture (1.7% ) and transportation (0.3% ).