Israel’s annual inflation rate eased more than expected in May, offering some relief as price pressures cool. However, the conflict with Iran and ongoing regional tensions continue to pose risks for the country’s inflation outlook and monetary policy decisions.
Inflation Slows but Stays Above Target
Official data released Sunday showed Israel’s inflation rate declined to 3.1% in May, below the 3.4% forecast from a Reuters poll. Despite the drop, inflation remains slightly above the government’s 1% to 3% target range. Inflation had previously peaked at 3.8% in January, marking the highest level since September 2023.
Impact of War-Related Supply Issues
Government officials have largely attributed the rise in inflation over the past year to war-related supply disruptions. The central bank, however, has also cited strong consumer demand as a contributing factor keeping prices elevated. The recent escalation in tensions with Iran has already pushed oil prices higher, adding further uncertainty to the inflation outlook.
Monthly CPI Declines in May
On a monthly basis, Israel’s consumer price index fell 0.3% in May compared to April, following a 1.1% increase the previous month. The decline was driven by lower costs in transportation, telecommunications, fresh vegetables, and housing services. These declines were partially offset by higher prices for fresh fruits, clothing, entertainment, health services, and food. Economists surveyed by Reuters had expected a 0.1% monthly increase.
Central Bank Holds Rates Amid Caution
On May 26, the Bank of Israel kept its benchmark interest rate steady at 4.5%, citing ongoing inflation risks stemming from the conflict with Hamas militants in Gaza. The central bank’s latest projection anticipates a 2.6% inflation rate for 2025. Bank of Israel Governor Amir Yaron emphasized the need for a cautious approach, signaling that policymakers may delay any rate cuts until inflation shows more sustained improvement.
Next Policy Decision Approaching
The Bank of Israel’s next interest rate decision is scheduled for July 7. Policymakers are expected to closely monitor inflation data, oil prices, and the evolving geopolitical situation before making further adjustments to monetary policy.
While May’s inflation data shows progress, Israel’s central bank remains cautious as regional conflicts continue to add uncertainty. Future interest rate decisions will likely depend on both domestic price trends and the broader geopolitical environment in the coming months.