Analysts' estimates for the September CPI were so very, very wrong.
The consumer price index has risen 1.8%, but price hikes haven't been felt equally by all. Photo by Guy Raivitz
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Over the past 12 months the consumer price index has risen 1.8%, but those price hikes haven't been felt equally by everyone.

While the basket of consumer goods and services bought by people with income in the top two deciles rose just 1.5%, those at the bottom two deciles paid 2.3% more.

Prices for fruits and vegetables, which went up 12.1% overall during the past 12 months, were 14.9% more expensive for the bottom 20% compared with 10.2% for the richest fifth of the population. Housing costs, which rose 2.2% on average, took a 2.4% larger chunk from the wallets of the 20% with the lowest incomes while rising just 1.7% for the highest 20% income bracket.

Another unfortunate development in the October CPI is that once again analysts miscalled it. In August they underestimated the extent of the rise while in September they overestimated it, expecting an increase of 0.5% when in the fact inflation was nil while in October they anticipated an 0.2% rise when inflation was in fact a negative 0.2%.

The October CPI brought the year-to-date inflation rate to 1.9%, exactly where analysts expect the 2012 figure to remain by the end of the year. The public's perception is that prices are rising, but the last two months have seen prices decline, according to the CBS. Economists are forecasting the downward trend to continue, with most seeing a 0.1% drop both in November and December.

The decision by the Bank of Israel's monetary committee at the end of last month to lower lending rates by 0.25 percentage points to 2% reflects the central bank's shift toward a more expansionary monetary policy that assumes the economy will slow in 2013 and that the government will adopt a de facto policy of fiscal restraint for the first months of next year. The latter is because in lieu of the Knesset's ever approving a 2013 budget, the 2012 spending parameters remains in force.

October's low inflation index serves to justify the monetary committee's decision as does the third-quarter GDP figures, which saw the annualized growth rate slow to a preliminary 2.9%.

Inflation right now is more or less in line with what Bank of Israel Governor Stanley Fischer is aiming for - the midpoint of the 1% to 3% inflation target range set by the government. But, if the remaining two indices of the year turn out as low as expected, the central bank could make another rate cut at the end of 2012 or beginning of 2013.