Palestine Monetary Authority expects a slight drop in inflation in 2015 to 1.6%

Donia Al-Watan:10/09/2015

The PMA has released the fifteenth issue of the "Inflation Report" in Palestine. The Report deals with consumer prices developments during the second quarter of 2015, in addition to the expected inflation rate in the following quarters of 2015 and 2016. The inflation rate has accelerated to 2.8% in 2015Q2, compared with 0.6% in the previous quarter, and 1.3% in the corresponding quarter of 2014. This acceleration was mainly driven by the huge hikes of commodity prices in Gaza Strip (GS) under the ongoing blockade, and to a lesser extent, due to the moderating decline in global commodity prices.

The Report pointed out that the changes in the West Bank (WB) prices were largely different than those in GS due to different price determinants. Price developments in the WB are highly sensitive to changes in global prices, while the blockade in GS continued to be the dominant factor. During the second quarter of 2015, prices in the WB have increased by 2.0% mainly due to the increase in food prices, while Gazan prices increased by around 4.0% as a result of increases in food prices and transportation costs.

The Report also clarifies that inflation in Palestine is mainly imported, and greatly influenced by world prices, particularly for food and oil; the decline in the prices of these two items, which account for the largest weights in Palestine's CPI basket, has driven the drop in local inflation rates.

In order to forecast price changes in Palestine, two factors are taken into consideration. The first is the cost of imports which reflects inflation and exchange rates in trading partners; and the second is the world food price index. Overall, the Report expected that the inflation rate will drop to 1.1% in 2015Q3, compared with the previous quarter, but it will increase again after that. These forecasts reflect mainly an expected increase in cost of imports, and a forecasted decline in world food prices. However, the overall inflation in 2015 is expected to fall to 1.6%, compared to 1.7% in 2014.

However, deviations in the expected world prices and exchange rates will lead to deviations in the expected inflation rate. Thus a positive one-standard deviation shock in external conditions may increase Palestine’s inflation in 2015 from 1.6% to nearly 2.1%, while a negative one-standard deviation shock may bring it down to 1.1%.