Aaron Katsman
IsraelNewsletter.com

Israel’s CPI reading for May came in  with a rise of 0.7%. This is the highest CPI for May in 7 years. While the number came in at the high end of estimates, it wasn’t much of a surprise. We have been speaking about surging inflation for about a year. I would expect the June CPI number top be strong as well, due to a strengthening US dollar. The USD has a very strong weighting in the index, and in fact over the last year, it has skewed the CPI number down, because the USD has been so weak. Now that it has started to move higher against the Shekel, something that started in June, I would look for continued higher CPI numbers looking ahead.

I look for the Bank of Israel to potentially  raise interest rates in order to try and curb the spike in inflation. With local interest rates now at 3.5% , I wouldn’t be surprised to see rates a full 1% higher by the beginning of the fall.

While this continued inflation is going to hurt local fixed rate Israeli bonds, look for Israeli hi-tech to actually benefit from this move (read our analysis).

Disclosure: Author’s fund has no position in any stock mentioned as of 6/16/08.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Choosing to continue to try and rein in inflation, the Bank of Israel left interest rates unchanged for February at 4.25%.

According to Marketwatch, the Bank of Israel’s target inflation rate is 1% to 3%, while the country’s consumer-price index rose 3.4% for 2007. The CPI added 0.6% in December.

Weaker growth prospects in the United States also may help restrain inflation in Israel, by reducing Israel’s exports and domestic demand and by moderating the rise in prices of imports, including energy and food, according to the central bank, reported the same Marketwatch article.

The dollar continues its downward slide versus the shekel and has dropped 5% more since the last time the Bank met in late December. We’ll see the strong shekel start to really hurt earnings for those Israeli companies listed on US exchanges that do R&D in Israel. We’re hearing this already from CEOs and investors should keep an eye out for this trend during earnings season.

NEW! Introducing Israel Opportunity Investor, our monthly subscription-only newsletter. Stay ahead of the game and make smart decisions in Israel stocks. Go here to learn more.

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