Israel's consumer price index for September has dropped by 0.1% - Inflation stands at 3.8%

Israel's consumer price index for September has dropped by 0.1% compared to August, leading to a decrease in the annual inflation rate from 4.1% in August to 3.8%. The unexpected drop in inflation is bolstering expectations that the Bank of Israel will not raise interest rates at its upcoming October meeting, taking into account the slowing inflation and the economic impact of the recent conflict.

However, experts are keeping a watchful eye on the situation, as it's too early to determine the full factors influencing the recent index changes. Initial reports indicate that significant price reductions were noted in the transportation sector (1.5%) and the food, culture, and entertainment sectors (each experiencing a decrease of about 0.5%). In contrast, the fresh fruits and vegetables category saw a 4.3% increase, though this is considered a volatile section. Additionally, education services saw a 1.3% increase, while more modest upticks of 0.5% were observed in rent, furniture and home equipment, clothing, footwear, and health.

Some economists are now speculating that the central bank governor may opt to reduce interest rates following the recent conflict. Yonatan Katz of Leader Capital Markets suggested a rate cut of at least 0.5%, potentially even before the next scheduled decision. Such a move is intended to provide relief to both businesses and households, with expectations that it won't significantly impact the exchange rate, as the Bank of Israel plans to continue selling foreign currency as needed.

In a written statement to the G30 forum, the governor of the Bank of Israel emphasized that inflation expectations haven't significantly shifted since the conflict. While the immediate impact on inflation remains uncertain, a potential slowdown is anticipated in the medium term. He noted that the greatest risk to inflation continues to be the devaluation of the shekel, and the programs in place align with supporting the inflation target.

Meanwhile, the housing market in Israel remains on a downward trajectory. Data from the Central Bureau of Statistics shows that apartment prices dropped by 0.4% when comparing transactions from July to August 2023 with those from June to July 2023. This trend persists across different regions, with Jerusalem (-0.3%), North (-1.1%), Haifa (0.2%), Center (-1.5%), Tel Aviv (0.6%), and the South (-1.5%) all experiencing price declines. New apartment prices also decreased by 0.6%.

While the data pertains to traditionally slower months in the real estate sector, it indicates a significant contrast to the 20% price increase experienced in the same period last year. The annual housing price index showed a modest 0.8% increase, with varying results by region. Haifa (4.2%), North (3.7%), Jerusalem (1.2%), South (0.9%), Tel Aviv (0.8%), and Center (1.6%) recorded different annual price changes. However, the annual new apartment price index fell by 2.1%.

The decline in housing prices began in March, with prices decreasing by approximately 1.7% since then. The industry was previously experiencing stagnant prices in February and March after a period of growth. Conversations with industry experts suggest that this trend has only intensified since September and early October, and it's anticipated that price drops will continue, albeit with lower transaction volumes in the coming months.

On another note, the construction input price index increased by 0.1% in September 2023, and it has risen by 1.7% since the beginning of the year. Over the last 12 months, the index showed a 1.6% increase, mainly attributed to a 2.3% rise in the prices of materials and products and a 1.5% increase in wages, with cement prices surging by 2.1%.