Israeli Inflation Unexpectedly Falls in October After Nine Increases

(Bloomberg) -- Israel’s inflation rate unexpectedly slowed in October as food and transportation prices dropped, snapping nine consecutive months of increases as the global economy emerges from Covid shutdowns. 

Consumer prices rose 2.3% from a year ago, well below the median estimate of 2.6% in a Bloomberg survey of 18 economists, and down from 2.5% in September. Consumer prices rose 0.1% from September, below a forecast of 0.4%.

Israel’s inflation rate remains significantly below the OECD average of 4.56%, and October’s data mean the central bank now has even less reason to raise interest rates from the record lows that have helped the economy weather the pandemic.

Prices of fresh vegetables and fruits decreased by 2.5%, while transportation costs fell by 1.1%, according to Israel’s Central Bureau of Statistics. The Bank of Israel has repeatedly said the recent increase in inflation is transitory, driven by disruptions to the global supply chain, and expects the rate to fall back to the bottom half of the government’s 1%-3% target range as soon as next year. 

Meanwhile, a stronger shekel -- which reached a 25-year high near 3.10 to the dollar earlier this month -- is helping to balance out inflationary pressure in Israel, along with lower-than-average increases in energy prices due to an abundance of natural gas, according to a recent investor note from Bank Hapoalim. 

The Bank of Israel maintained interest rates at a record-low 0.1% in its last monetary policy meeting on Oct. 7, but plans to wind up by year’s end an 85-billion shekel ($26.3-billion) bond-purchasing program that supported the economy through the Covid-19 pandemic, tightening monetary policy in lockstep with the U.S. Federal Reserve. 

Israel’s economy has improved dramatically since the beginning of 2021, growing by 16.6% in the second quarter as the country bounced back from government-imposed lockdown.

The underlying factors supporting the strengthening shekel, including record foreign investment and a persistent current account surplus, are unlikely to change any time soon. 

Governor Amir Yaron has said the central bank’s intervention program wasn’t designed to stop the currency appreciation but to help the economy transition in the long run from a “production-oriented economy to a service-oriented economy,” without exacerbating unemployment. 

©2021 Bloomberg L.P.