May CPI surprised to the downside, but inflation remains near 3% – rate cut unlikely due to geopolitical risks

ISRAEL - In Brief 16 Jun 2025 by Sani Ziv

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May CPI surprises with a 0.3% drop, driven by a sharp fall in prices for trips abroadMay CPI in Israel surprised to the downside, falling 0.3% month-on-month, driven primarily by a sharp 15.5% drop in overseas travel prices. This brought the annual inflation rate down to 3.1%, from 3.6% in April. The unexpected decline follows a 1.1% increase the previous month, leaving the two-month cumulative rise at 0.8%—broadly in line with earlier forecasts. Market expectations for May were unusually volatile, ranging from –0.2% to +0.4%, due to high uncertainty surrounding international travel costs. In the end, the steep drop in this volatile component reversed part of the 27.2% surge recorded in April.Other components also surprised on the downside Several CPI components recorded more moderate increases than their usual seasonal patterns. Clothing and footwear prices rose by just 1.4%, compared to a typical seasonal rise of 2.9%. Fresh fruit prices increased by 3.9%, well below their seasonal average of 8%. Food prices posted a modest 0.2% increase in May, bringing the 12-month increase to just 3.4%. Housing costs, measured by renewed rental contracts—fell by 0.3% during the month, even though they have remained 3.6% higher over the past year. Trend analysis: inflation converges toward upper bound of target The chart below shows Israel’s monthly inflation (bars, left axis), year-on-year inflation (light blue line, right axis), and 3-month rolling inflation at an annualized rate (dark blue line). As of May, both the year-on-year and the 3-month rolling measures have converged toward an annual inflation rate of 3%, which represents the current pace of inflation in Israel and mark...