Israel Economic Update: Strong May CPI

Aaron Katsman

Israel’s CPI reading for May came in with a rise of 0.7%. This is the highest CPI for May in 7 years. While the number came in at the high end of estimates, it wasn’t much of a surprise. We have been speaking about surging inflation for about a year. I would expect the June CPI number top be strong as well, due to a strengthening US dollar. The USD has a very strong weighting in the index, and in fact over the last year, it has skewed the CPI number down, because the USD has been so weak. Now that it has started to move higher against the Shekel, something that started in June, I would look for continued higher CPI numbers looking ahead.

I look for the Bank of Israel to potentially raise interest rates in order to try and curb the spike in inflation. With local interest rates now at 3.5% , I wouldn’t be surprised to see rates a full 1% higher by the beginning of the fall.

While this continued inflation is going to hurt local fixed rate Israeli bonds, look for Israeli hi-tech to actually benefit from this move (read our analysis).

Disclosure: Author’s fund has no position in any stock mentioned as of 6/16/08.

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