December CPI release: a downward surprise

ISRAEL - In Brief 16 Jan 2025 by Sani Ziv

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The consumer price index reading for December was down by 0.3%, below market expectations for an index between 0.0% and 0.1%. This brought the annual inflation rate down to 3.2% from 3.4% in November, with core inflation (seasonally adjusted, excluding housing, fruits, and vegetables) at 3.1%—slightly above the upper bound of the central bank’s inflation target of 1%-3%. This marks the third consecutive month where inflation came in below forecasts. While the deviation can be reasonably attributed to factors such as an unusually warm winter, the volatility in airfares and expanded agricultural production following the ceasefire agreement, the data indicate continued moderation in inflation compared to expectations a few months ago. However, the upcoming months will be crucial in assessing price trends, particularly as the fading impact of the Israeli currency’s appreciation will intersect with expected price hikes from tax increases and adjustments in regulated prices (electricity, water, and property taxes). Key drivers of December's CPI December’s inflation print was driven by a 4.4% decline in international travel prices, alongside decreases of 6.2% and 4.5% in prices of fresh vegetables and fruit. International travel prices have been volatile this year, largely due to fluctuations in airfares, with the most recent fall reflecting the resumption of flights to Israel in November and December, coupled with the sharp appreciation of the shekel (4.1% against the U.S. dollar and 2.7% against the euro). Meanwhile, food inflation edged up slightly by 0.2% month over month and 4.3% year over year. Housing rental prices, which account for 26% of the CPI basket, rose by 0.3%...