Israel CPI: Inflation rises to 3.8% in January, VAT hike and tariffs drive index higher

ISRAEL - In Brief 16 Feb 2025 by Sani Ziv

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January CPI overview Israel's Consumer Price Index (CPI) rose by 0.6% in January, slightly above our forecast of 0.5%, bringing annual inflation to 3.8%, up from 3.2% in December. The increase was primarily driven by the higher VAT, taxes on electric vehicles, and rising electricity, water, and municipal tax rates. The shekel appreciated modestly by 0.1% against the dollar and 1% against the euro, limiting its direct impact on inflation. Excluding the VAT hike, annual inflation would have been around 3%, still at the upper limit of the 1%-3% target range set by the Bank of Israel. Key drivers of January CPI The VAT hike from 17% to 18% significantly influenced January’s inflation. Food prices rose by 1%, with notable increases in chocolates and confectionery, tea and coffee, cosmetics, baby products, and jewelry, suggesting that some businesses used the VAT hike as an opportunity for additional price increases. Regulated prices surged: electricity +4.1%, water tariffs +2.8%, and property taxes +2.3%. International flights costs continued to decline, reflecting the growing number of flights to Israel. Clothing and footwear prices fell by 4.2% due to seasonal effects, slightly offsetting the overall CPI increase. Historically, January’s CPI tends to be negative (-0.2%) due to seasonal effects in clothing and footwear. However, the VAT hike pushed this year’s index into positive territory. Housing prices showed mixed trends: Rental prices remained flat, while owner-occupied housing prices declined by 0.7% month-over-month and 3.1% year-over-year. Israel CPI: actual and forecasted inflation trends Inflation outlook Inflation is expected to remain elevated in the coming mon...