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Last update - 22:12 18/05/2008 Without gambling on the economy By Haretz Editorial Tags: Economics, Stanley Fischer  The April consumer price index (CPI) succeeded in surprising both the Bank of Israel and the Finance Ministry. It rose by 1.5 percent, while it had been expected to increase by only 1 percent. If we could talk until March of reasonable inflation, the April index made it clear to everyone that inflation has truly reared its head. It increased to 4.7 percent during the past 12 months, while the government target is 1 percent to 3 percent. The May index is also expected to be relatively high, and perhaps that of June as well, so for the time being, there is no sign that the price increases will slow. The main losers are the people in the two lowest economic deciles, because the price increases were mainly on food products. The price index of the basket of goods consumed by the two lowest deciles rose during the past year by 5.6 percent, while the basket of those in the two highest deciles increased by only 4.2 percent. For those with index-linked mortgages, the monthly payment has now gone up 1.5 percent. The finance minister knows that the other ministers will now raise new demands, in addition to the requests for billions of shekels they submitted before discussion of the 2009 budget. Shas Chair Eli Yishai will demand that child allowances be increased, to help the weaker sectors who have been hurt. Social Affairs Minister Isaac Herzog will say that state allowances will have to be adjusted twice a year, against erosion. The Pensioners' Party will demand adjustment of old-age pensions. The local authorities have declared a warning strike. And all this has preceded the cabinet's consideration of the treasury's planned NIS 1.5 billion cut in the 2008 budget and a far larger cut in the 2009 budget. Advertisement The high CPI has also complicated the picture for Stanley Fisher, the governor of the Bank of Israel. Until March he claimed that the deviation in the rate of world price increases stemmed from the sharp increase in the price of oil, metals and food. In other words, this is imported inflation, so raising the interest rate is not effective. The governor even estimated that the slowdown in the economy would lead to a reduction in demand, and therefore inflation would decline to the target figure in the second half of 2008. He, therefore, gambled and lowered the interest rate in March and April, by half a percentage point each time, to help exports and growth. But the April index demonstrated that the price increases this time were not only in goods related to oil and food. Almost the entire basket of goods became more expensive, proof of the fact that this is not only imported inflation, but inflation in demand as well. The talk of a slowdown in the economy is somewhat exaggerated. The fact is that unemployment is on a downward trend and the growth figures to be published next week will be better than the Bank of Israel had estimated. Therefore, the governor has no choice but to raise the interest rate next week. Although he knows that the dollar will weaken as a result, and that will harm exports and growth, he has to remember that his main job is to maintain price stability. Nor does the finance minister have any choice. He must bring the 2008 budget cut to the government now, and receive the approval of the prime minister for a far larger cut in the 2009 budget. Both of our economic leaders must behave responsibly. They must not gamble on stability and growth. Bookmark to del.icio.us   Nothing to fear Nancy Pelosi in Israel: I trust all presidential candidates in regard to Israel. Bonfire drama Mount Meron grave of famed rabbi at center of ownership row.   1.   CPI a big fat lie 08:20  |  Hoi polloi 19/05/08

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