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Israel inflation rate: Bank of Israel has little wriggle room as cost increases show no signs of slowing

By Nicole Willing

Edited by Charlie Mellor

17:28, 25 November 2022

Jerusalem, the old city of Israel at the Western Wall and Dome of the Rock.
Israel’s inflation rate history is one of the most volatile in the developed world. Photo: Sean Pavone / Shutterstock

Israel’s central bank raised its benchmark interest rate for a sixth consecutive time on 21 November after annual inflation came in higher than expected for October.

The inflation rate in Israel returned to 5.1% last month, after falling from a 14-year high of 5.2% in July to 4.6% in August and September. 

What is driving the rise in prices, and what is the Israel inflation forecast outlook heading into 2023?   

How is inflation measured in Israel?

Inflation refers to the rate at which prices for goods and services in an economy rise over time, which erodes consumer purchasing power. A healthy inflation rate is considered to be around 2%. Central banks in many countries have set 2% as their target to maintain price stability. Israel’s central bank, the Bank of Israel, has set its target at the 1% to 3% range.

The rate of inflation rises when demand for goods and services exceeds supply, which drives up the prices that suppliers can charge. Rising costs for inputs such as raw materials and components can also drive inflation, as suppliers pass the higher costs that they pay on to customers to maintain their profits.

Countries measure their inflation rates by comparing prices for the items in a basket of goods and services with their prices in past periods, primarily months or years. 

There are several different types of indices used to measure inflation, such as a consumer price index (CPI), retail price index (RPI), personal consumption expenditure (PCE) or producer price index (PPI). Headline inflation refers to the overall price change, while core inflation excludes volatile prices such as food and energy.

Each country’s government statistics office compiles inflation data to inform policy and provide information to the public. In Israel, inflation rate data is collected and published by the Central Bureau of Statistics (CBS). Israel’s core CPI excludes housing, fruit and vegetable prices.

Israel’s inflation rate history is one of the most volatile in the developed world. It approached 500% in the 1980s, until the government introduced an emergency stabilisation programme.

The measures introduced in 1985 – including cutting government spending and deficits, uncoupling wages from inflation rates, imposing temporary price controls, and devaluing the shekel – quickly brought inflation back down to 15%-20% for the rest of the decade. 

By the early 2000s, the rate had fallen below 8%, and since 2008 it has averaged less than 2%. Since 2021, the inflation rate in Israel has averaged 1.49%.  

Shekel weakness stokes Israel’s inflation rate

Israeli interest rate 5-year historical chart

Israel’s October inflation rate had been expected to rise by 5% rather than 5.1% year on year and by 0.5% from September, rather than the 0.6% reported by the Central Bureau of Statistics. The price increases were led by housing, transport & communication, food excluding fruit and vegetables, and property maintenance.

The Bank of Israel has raised its benchmark interest rate six times this year, from 0.1% in April to 3.25% in November, as it attempts to prevent inflation from rising at a faster pace than its major trading partners in North America and Western Europe. While Israel’s inflation has climbed to its highest level in a decade, its trading partners have seen their rates climb to 30-40 year highs this year.

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Israel has avoided the impact of high international energy prices, as it has domestic oil and gas production and long-term fixed price contracts for imports. But weakness in the value of the Israeli shekel against the US dollar has increased the cost of importing other goods.

The central bank’s Monetary Committee said on Monday 21 November: “The Israeli economy is recording strong economic activity, accompanied by a tight labour market and an increase in the inflation environment.

“The committee has therefore decided to continue the process of increasing the interest rate. The pace of raising the interest rate will be determined in accordance with activity data and the development of inflation, in order to continue supporting the attainment of the policy goals.”

The committee added: “In the committee’s assessment, the monetary tightening processes in Israel and abroad, and the moderation of demand alongside the easing of the supply chain difficulties and the decline in commodity prices, will act to moderate inflation.”

Will Israel’s inflation rate return to the 1% to 3% target? If so, how long could it take? Let’s take a look at the latest Israel inflation predictions below.

Israel inflation rate: What is the outlook for price increases?

The Bank of Israel (BoI) anticipates that inflation will return to its target range within a year. It said: 

“One-year inflation expectations derived from the capital market are within the target range, while one-year expectations from other sources are around the upper bound of the target range. Expectations for the second year and onward from the capital market are within the target range.”

Data provider Trading Economics predicts that the Israel inflation rate in 2023 will decline from 5.2% to 2.9% at the end of 2022, and fall to 2% in 2024, based on its econometric models.

Analysis by Dutch bank ING on Israel’s expected inflation indicates that the country "should be warier of second-round inflation effects than most since the economy is operating above capacity and at full employment. 

“However, the BoI hints that its tightening cycle might end around the 3% area and that inflation should come back into the BoI’s 1% to 3% target range by the end of 2023. The risks would seem to be skewed towards the BoI needing to tighten further.”

The Israel inflation rate forecast from FocusEconomics expects consumer prices to rise by 3.2% in 2023, unchanged from last month’s forecast, with inflation falling to 2% in 2024.

Capital Economics expects Israel’s economy to slow down next year. The research firm said in an analysis of the country’s third-quarter growth: “We think Israel’s economy will hold up better than other parts of the world over the coming quarters but the recent period of strong growth has come to an end and a phase of below-potential growth is likely to continue throughout 2023.”

The firm added: “The Bank of Israel slowed down the pace of tightening... with a 50bp rate hike, to 3.25%, as it emphasised the tightening delivered so far and the early signs that economic activity is slowing. We think it will end its tightening cycle early next year with just two more 25bp hikes, to 3.75%.”

The BoI indicated in October that it expected interest rates to peak in the 3% range, so it is running out of room for further hikes to combat inflation.

If you are looking for an Israel inflation rate forecast to inform your trading decisions, keep in mind that economic and geopolitical instability can result in real rates diverging from predictions.

We recommend that you always do your own research. Look at the latest market trends, news, technical and fundamental analysis, and expert opinion before making any investment decision. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

FAQs

What is the current inflation rate in Israel?

Inflation in Israel rose to 5.1% in October from 4.6% in August and September. That was close to the 14-year high of 5.2% seen in July.

Has inflation been going up or down in Israel?

Israel’s inflation rate has doubled from 2.4% a year ago.

Why is inflation so high right now?

Inflation has increased in Israel over the past year on higher food prices and a weakening shekel against the US dollar, although it remains lower than in the US, Europe and UK.

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