The PMA has released the new volume (number 13) of the inflation report in Palestine. The report deals with consumer prices developments during the fourth quarter of 2014, in addition to the expected inflation in the coming eight quarters. The report showed that the inflation rate has dropped to 1.3% in 2014Q4 (on annual basis), compared with 2.3% in the previous quarter, and 2.0% in the corresponding quarter of 2013. This slowdown consisted with the dwindling inflation rates in most countries during the same period, as the world commodity prices, particularly food and oil, started to diminish since September.
The report also indicates that the declines in the indices of food and soft drinks, and of transports have contributed to lowering the inflation rate in 2014Q4 by 0.69 percentage point and 0.37 percentage point, respectively. But when ignoring the above mentioned decline, inflation would exceed the threshold of 2%, particularity with the increase in the indices of alcoholic beverages and tobacco, and miscellaneous goods and services prices. The contributions of latter two groups to inflation amounted to 0.92 percentage point and 1.2 percentage point, respectively. Changes in the indices of the remaining CPI components were minimal in 2014Q4.
The report also clarifies that the inflation in Palestine is mainly imported, and greatly influenced by world prices, particularly food and oil prices whose decline led to a drop in local inflation rates.
In order to forecast prices changes in Palestine, two factors are taken into consideration: the first is the cost of imports which is primarily affected by the inflation and exchange rates in trading partners; the second is the world food price index, as food accounts for the largest weight in the CPI basket in Palestine. In this context, the report expected another drop in inflation in the coming quarter (2015Q1) to around 0.9%. Moreover, lower annual inflation rates in 2015 quarters are expected, compared to the previous rates in 2014 quarters. These expectations reflect the anticipated decline in food prices, and the slowdown in cost of imports during 2015. As a result, inflation in 2015 is forecasted to fall to 1.2%, compared to 1.7% in 2014.
However, deviations in the expected world prices and exchange rates will lead to deviations in expected inflation rate. In specific, a positive one-standard deviation shock in external conditions may increase Palestine’s inflation by 2.7 points to 3.9% on average during 2015, while a negative one-standard deviation shock may bring down inflation in Palestine by 2.8 points to -1.6%, during the same period.