Inflation Falls to 3.1% in May as Consumer Price Index Surprises to the Downside: drops 0.3%

After April’s unexpected inflation spike, new data from the Central Bureau of Statistics (CBS) delivered a surprise in the opposite direction: Israel’s Consumer Price Index (CPI) fell by 0.3% in May, defying economists' forecasts of a 0.1% increase. This unexpected decline eased the annual inflation rate to 3.1%, down from 3.6% in April. Despite the drop, inflation remains slightly above the Bank of Israel’s target range of 1–3%.

The fall in May's CPI was largely driven by a sharp 7.9% decline in the “travel abroad and flights” category, which had jumped 15.9% the previous month and heavily influenced April’s inflation rise.

Other notable declines include:

• Car insurance: -3.0%

• Fresh vegetables: -0.6%

• Housing services owned by tenants: -0.3%

• Transportation and communication overall: -2.4%

Conversely, several sectors saw price increases:

• Public transportation: +9.8% (due to a government-initiated fare hike)

• Fresh fruit: +3.9%

• Clothing and footwear: +1.4%

• Culture and entertainment: +0.6%

• Health and miscellaneous items: +0.3% and +0.4% respectively

• Food and rent: both up by 0.2%

Economic Uncertainty Looms Amid Conflict

The May figures reflect price movements before the recent escalation in the conflict with Iran. Analysts warn that upcoming indices may be affected by:

• Shekel depreciation

• Disruption of imports and raw material supply chains

• Reduced economic activity due to reserve mobilization

• A surge in demand for rental housing by displaced residents

These factors could reignite inflationary pressures, complicating the Bank of Israel's policy response.

No Immediate Interest Rate Cut Expected

The Bank of Israel’s next interest rate decision is due on July 7. While a rate cut was already viewed as unlikely in the near term, the recent hostilities have made monetary easing even less probable — at least in the short run.

The May CPI data will be the final inflation reading before the Monetary Committee meets, providing a crucial input into rate decision deliberations.

Housing Market: Prices Show Signs of Cooling

A minimal 0.1% decline in the national housing price index was recorded for March–April 2025, following a similar decrease in the previous month’s publication. This marks the first time in several months that overall housing prices have shown consistent signs of stabilization.

• New apartment prices alone, however, continued to rise by 0.4%.

• Annual home price inflation still remains elevated at 5.1%, though down from 6.4% last month.

• New apartment prices climbed by 5.8% annually.

Regional Housing Trends

Monthly price changes by district:

• Jerusalem: +1.2%

• Central: +0.3%

• Southern: -0.2%

• Tel Aviv: -0.6%

• Northern: -1.3%

• Haifa: unchanged

On an annual basis, all districts saw price increases:

• Northern District led with a 9.5% rise, followed by Jerusalem and Tel Aviv.

• The Central District posted the lowest annual increase at 2.9%.

Inflation May Rise Again

While May brought temporary relief on the inflation front, continued fighting and economic disruption could soon reverse the trend. With rising rental demand, currency volatility, and uncertainty in global supply chains, policymakers will face complex decisions in the months ahead.