Precisely during wartime: Inflation at a low

In line with market expectations, the July index rose by 0.3%, bringing annual inflation down to just 1.5%, the lowest rate since May 2021. In just one year, inflation has been cut in half: in July 2025 it stood at 3.1%, above the upper limit of the price stability target set by the government (an annual rate of 1% to 3%), and now it is closer to its lower limit. It is worth remembering that the economy's disinflation is taking place in a country at war.

Recent economic literature almost automatically links wars to inflation: damage to supply, a surge in public spending, currency depreciation, and a risk premium that is passed on to prices. In Israel, the first three channels have been blocked. The 5-year CDS level (which indicates the degree of debt repayment risk) is at 56 points (4 points above the level on the eve of the October disaster), the dollar is below 3 shekels, local gas disconnects the index from global energy shocks against the backdrop of the war with Iran, and the last few months have been relatively calm on the military front. The result is a war that does not generate inflation, and this is an exception to the international pattern.

The rise in the index in July is explained almost entirely by one item: expenses for travel abroad and domestic flights, which rose by 7.5% and contributed 0.32 percentage points to the index, more than the overall increase. The hospitality, vacation, and travel item added another 4.1%, as it does every July, due to the start of the summer vacation. This is mainly the seasonality of the summer holiday, and less of a trend. Excluding seasonality, the index rose by only 0.1%. The inflationary pressure is in the services sector, not in tradable goods. The conservative policy of the Bank of Israel has borne fruit. According to a J.P. Morgan calculation, at least half of the 115 items in the index fell in July: the median was minus 0.1% in annual terms.

Food prices remained unchanged, furniture and home equipment fell by 0.7%. In contrast, several service items continue to become more expensive: the culture and entertainment item rose by 1.1%, hotels and guesthouses by 4.5%, transport services by 2%, and other housing expenses (taxes, brokerage, contract drafting, and insurance) by 2.1%. In other words, inflation has not been defeated: services are the sticky component, the one influenced by wages rather than import prices. And of course, housing, which rose by 0.7% for the month (both rent and housing services owned by tenants). In renewed rental contracts, an annual increase of 2.6% was recorded, and in apartments that changed tenants, 4.7%. The number that summarizes the story is in another line of the Central Bureau of Statistics announcement: the index excluding housing rose by only 0.6% over the last year.

Governor Amir Yaron and his colleagues at the Bank of Israel can breathe a sigh of relief: the conservative policy has borne fruit. The Bank of Israel, unlike very many other central banks, has a wide — and rare — room for maneuver. The interest rate now stands at 3.5% after three cuts this year — in January, May, and July — and the research division's forecast from July speaks of inflation of 1.8% in 2026 and 2027 and an interest rate of 3% in a year. In the USA, for comparison, inflation in July was 3.4% and the Fed has not moved the interest rate for five decisions. This is effectively the last inflation reading before the upcoming monetary decision in about two weeks, and the data allows the Bank of Israel to continue moving another step forward with monetary expansion and interest rate reduction.