Huge swings in the cost of Israeli airfares have left economists struggling to get a handle on inflation in wartime.
A new methodology used by Israel’s statistics bureau to measure the prices of airplane tickets has caused so much confusion that almost all forecasters failed to predict the direction of inflation in the past two months. A single analyst in a Bloomberg survey of 18 correctly said annual price growth wouldn’t accelerate in May, when the cost of air travel plunged following a surge a month earlier.
Though airfares account for just 1.6% of the consumer-price index, they are part of a larger transportation and communication category that makes up nearly a fifth of the basket, meaning big changes can heavily tilt monthly readings up or down.
“The transportation section has had great fluctuations in recent months,” says Nira Shamir, chief economist at Israel Discount Bank. “It is, in fact, becoming unpredictable.”
At stake is the ability of banks and traders to make investment decisions such as whether to favor instruments linked to consumer prices or look for other ways to hedge their exposure. The recent surprise readings also make it harder to map out the path of monetary policy after the central bank shifted to a pause following an interest-rate cut to start the year.
At the root of the confusion is a methodological change made by Israel’s statistics service just a month before the Oct. 7 attacks by Hamas that triggered a retaliatory offensive by Israel.
It previously relied on annual price lists published by air carriers, using the fare in the month of purchase rather than the time of departure. But under a revision made last September, costs are now monitored through an automated process that scans thousands of online transactions, averaging out prices for tickets bought one, four and seven months ahead of a trip.
Forecasters complain that the bureau stopped publication of results using the old method in parallel to the new approach. The agency sees no need for it given that the two calculations measure different sets of data.
Also adding to the uncertainty, the war has thrown Israel’s air travel market into chaos. The number of international carriers operating in Israel dropped by 30% and the number of flights by 40% since the beginning of the conflict.
The result is that price fluctuations from month to month have been volatile, as airlines cease and restart operations to Israel, while demand from travelers swings back and forth depending on the course of the war.
Even the statistics bureau concedes the lack of predictability is here to stay for the foreseeable future.
“It may take up to a year of routine activity until forecasters are better able to lean on data history,” the service said.
Despite the dislocation, most economists largely agree that inflation will hit or slightly surpass the top end of the official 1%-3% target range in a year, and predict airfares might be a major cause of a possible overshoot.
Bank Hapoalim’s chief strategist, Modi Shafrir, expects the air travel component to adjust sharply higher over the summer. That’s prompted him to raise the Israeli lender’s inflation forecast to 3.3% a year from now.
A Bank of Israel survey published on Wednesday showed the country’s average inflation forecast for the next 12 months at 2.9%.
“We do not think that the surprise in May’s CPI signals a shift in the inflation environment, but rather more ‘noise’ around airline fares,” Shafrir said in a report. “Inflation risks remain elevated.”
