Last year's negative CPI is the Klein index - small and negative and not to Klein's credit. He failed to understand early in the year that Benjamin Netanyahu's arrival at the treasury, combined with U.S. loan guarantees and the end to the Iraq war all added up to a strategic sea change.
He did not believe the rise in stocks and bonds that started in March and he reckoned the bubble would burst quickly. He continued to believe the big problem was the large deficit in the budget that would lead to a crisis and spiraling inflation.
So, he continued a defensive policy of high interest rates through the year, causing enormous damage to the business sector and creating negative inflation - deflation - for the first time in the history of the state. Even International Monetary Fund officials were found criticizing the government.
Mistakes of course can be made in forecasts. There's no economic expert who knows how to predict exactly what will happen in the coming year. But in monetary policy, interest rates are a flexible instrument. Rates can be changed quickly, every month - or even every week - so if a certain reduction appears to be a mistake, it can be corrected quickly.
But Klein did not listen to all the advice around him, not to the treasury, not to private sector economists. He lowered rates too slowly and too late. His aim was to reach a CPI of 1-3 percent, so a negative index is a definite failure.
Yesterday's explanations from the central bank were pitiful. Once again we hear the expectations for inflation were in the 1-3 percent range - but one doesn't go shopping with expectations. The only thing that counts is results, real results. Expectations are measured with various models, and who's to say the central bank model is the most correct?
The bank says the main forces lowering prices was the shekel strengthening against the dollar and the recession. That's very interesting. The high interest rate Klein maintained was one of the elements, if not the main one, for the revaluation of the shekel upward and the dampening of economic activity.
Nonetheless, the mourning should not be exaggerated. A negative CPI is not a disaster and not a crash. Hyperinflation is a real disaster, like the 445 percent we suffered in 1984.
A negative CPI does not necessarily prevent growth - it is possible to have zero inflation and economic growth. Until the outbreak of the intifada, 2000 was one of the best years in the history of the economy - with zero inflation and 7.4 percent growth.
There are other advantages to a negative CPI. It provides stability. This month's salary is the same as last month's - and even worth more. Anyone who took a mortgage linked to the index or the dollar is paying less every month, which improves their survivability.
Renters pay less and the government also profits from the negative index. Linked government payments on internal debt and National Insurance Institute payments even decline, and that is an enormous budget saving.
In other words, the real problem is not the negative index but the heavy recession and unemployment resulting from the political situation, the intifada and terror attacks.
A wise political-economic policy aims for a low index and growth. For that we need a political horizon offering hope for peace and better lives that will bring tourists back, as well as investments and private consumption. Then the economy will move into rapid growth, with declining unemployment and stable prices.
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