Bank of Israel Governor Stanley Fischer has said his interest rate policy is designed to keep inflation in the middle of the government's target range of 1% to 3% a year - which means 2%. After missing the range for four years in a row, the consumer price index increased 2.7% for 2010. That's definitely within the range, and that's no small achievement for Fischer.
But it's far from the middle of the range, and that's a pity. The CPI should worry our decision makers, chief among them the officials at the Prime Minister's Bureau, the Finance Ministry and the Bank of Israel. Prices increased 3% for the country's two bottom deciles - nearly outside the government's target range - while they increased only 2.2% for the top two deciles; nearly smack in the middle of the range. Could it be that the governor sought to control inflation only for the country's best-off citizens? In other terms, prices increased 37% more for the poorest than for the wealthiest.
These statistics totally contradict the government's policy of closing social gaps and improving the well-being of the country's poorest. The CPI statistics show that the government's policies are actually achieving the opposite of its stated goals. In addition, basic services, which the country's poorest need more than other people, increased in price more than the CPI, which is an average for all products and services. Health costs increased 3.1%, and education costs increased 2.9%.
On top of that, inflation for the last quarter of the year was 4.6% in annualized terms, well beyond the government's target. To bring inflation back into the target range, Fischer would have to raise interest rates significantly - to 2.5% at least, from the current 2%.
This, too, would hurt society's weakest members. But there's something more damning - the government is raising taxes on basic products such as water and gas, even though it has no real reason to, and it is stubbornly refusing to lower VAT back down to 15.5%, as it had promised. Raising the prices of gasoline, water, municipal property tax (arnona ) and public transportation will raise the prices of other basic goods and services, too. This will damage the well-being of all the country's residents, but the effect will be felt the most by the poorest. These price increases will be reflected in the CPI in the next few months as inflation increases beyond the expected rate.
It's hard to understand - and even harder to explain - how a government that finished 2010 with a record-breaking surplus from tax collection, of more than NIS 13 billion beyond its projections, has the nerve to increase the tax burden to levels that would break records in the West.
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