Israel's inflation falls to its lowest level in five years
The July CPI rose 0.3%, with seasonal travel costs accounting for more than the entire monthly increase and underlying price pressures remaining relatively subdued.
In line with market expectations, the July consumer price index rose 0.3%, bringing annual inflation down to just 1.5%, the lowest rate since May 2021. Inflation has been cut in half in just one year. In July 2025, it stood at 3.1%, above the upper limit of the government's 1%-3% price stability target. It is now much closer to the lower end of that range.
The decline is particularly notable because Israel's disinflation is taking place during wartime. Recent economic literature almost automatically links wars to inflation through several channels: supply disruptions, increased government spending, currency depreciation and a higher risk premium that ultimately feeds into prices.
In Israel, however, the usual mechanisms have largely been contained. The five-year CDS spread, which indicates the perceived risk of debt repayment, stands at 56 points, only four points above its level on the eve of the October 7 attack. The shekel has strengthened to below NIS 3 per dollar, while domestic natural gas has insulated the economy from some of the global energy shocks associated with the war with Iran. The past few months have also been relatively calm on the military front.
The result is an unusual combination: a country at war that is experiencing falling inflation rather than an accelerating price spiral.
The July increase was driven almost entirely by one seasonal category. Spending on travel abroad and flights rose 7.5%, contributing 0.32 percentage points to the index, more than the index's overall 0.3% increase. Accommodation, recreation and travel prices rose another 4.1%, as they typically do in July with the start of the summer vacation season.
Much of the increase therefore appears to reflect seasonality rather than a broad acceleration in prices. After seasonal adjustment, the index rose just 0.1%.
The broader data reinforce that picture. According to a calculation by J.P. Morgan, at least half of the 115 components in the index declined in July, with the median change at minus 0.1% on an annualized basis.
The remaining inflationary pressure is concentrated primarily in services rather than tradable goods. Food prices were unchanged, while furniture and household equipment fell 0.7%. At the same time, culture and entertainment rose 1.1%, hotels and guesthouses climbed 4.5%, transportation services increased 2%, and other housing expenses, including taxes, brokerage, contract drafting and insurance, rose 2.1%.
That distinction matters. Goods prices are more directly influenced by global prices and imports, while services tend to be stickier because they are more closely tied to domestic wages and labor costs.
Housing remains another source of persistent inflation. Housing costs rose 0.7% in July, including both rents and the cost of owner-occupied housing services. New leases increased 2.6% over the past year, while apartments changing tenants recorded a 4.7% annual increase.
One figure in the Central Bureau of Statistics release captures the broader picture particularly well. Excluding housing, the consumer price index rose just 0.6% over the past year.
For Governor Amir Yaron and his colleagues at the Bank of Israel, the numbers offer some relief that their cautious monetary policy is producing results. The central bank has also retained considerably more room to maneuver than many of its peers.
The Bank of Israel's interest rate now stands at 3.5%, following three cuts this year, in January, May and July. The research department's July forecast calls for inflation of 1.8% in both 2026 and 2027, alongside an interest rate of 3% a year from now.
The contrast with the United States is significant. U.S. inflation stood at 3.4% in July, while the Federal Reserve had left interest rates unchanged at its previous five meetings.
The July CPI is also the last inflation reading before the Bank of Israel's next monetary decision in roughly two weeks. With inflation now well within the target range and underlying price pressures relatively contained, the data give the central bank room to continue gradually easing monetary policy.
The caveat is that inflation has not disappeared. Services and housing remain stubbornly expensive, and those are precisely the areas least affected by cheaper imports or a stronger shekel. The July figures therefore point less to the complete defeat of inflation than to a shift in where the remaining pressure is coming from.
