The January consumer price index fell by half a percent, making it the third month in a row with negative inflation, the Central Bureau of Statistics announced on Sunday.
Economists had forecast a negative CPI of between 0.5 and 0.7 percent.
Given the large drop in January inflation, the Governor of the Bank of Israel, Stanley Fischer, is now expected to lower February interest rates by at least 0.25 percent.
Israeli short-term interest rates are now at 1%, the lowest level in history, and some economists are even predicting that Fischer will lower rates next week by another 0.5 percent.
The 0.5 percent decrease follows the negative 0.6 percent and 0.1 percent CPIs in December and November, respectively.
Analysts and economists also expect inflation to remain negative in the next few months. This is the lowest January CPI since 2005, when it fell 0.6 percent.
Most categories of goods and services fell in price in January, lead by shoes and clothing, down 3.4 percent, and transportation, down 1.1 percent. Fuel prices fell 5.5 percent and the cost of vacations both in Israel and overseas was down 3.6 percent. Dairy products went down 1.3 percent.
Housing prices fell 1.1 percent and fresh fruit was down 0.9 percent. In total, food costs fell 0.6 percent in January.
However, there were categories that saw price increases: Fresh vegetables were up 1.1 percent and rent increased 0.8 percent while household goods and furniture rose 0.8 percent.
Cosmetics rose a big 3.9 percent and local taxes were up in January - the start of the new year, when tax rates are adjusted - by 0.9 percent.
The price of bus transportation was up 2.9 percent.
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