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There is no question that the economy is undergoing inflation. Until the consumer price index figure for June was released, the prevailing wisdom had been that 2009 inflation would more or less hit the upper boundary of the price stability target range, which is 3%. After the June figure, that broad consensus will have to head northward.

The consumer price index has run very high in the last few months. The 0.9% figure for June follows high figures in the preceding three months as well: 0.5% in March, 1% in April and 0.4% in May.

Altogether the index has increased 2.8% in four months, which is a very high increase. Moreover, the CPI is expected to continue to gallop in July, rising 0.7% to 0.8%. Maybe more.

The government's aim, and the Bank of Israel's job, is to keep inflation in the range of 1% to 3%. That is defined as price stability. Over the last 12 months, the CPI has risen by 3.6%, which is above price stability. It's inflation.

The most striking expression of inflation's intensity is the huge increase in the money supply. It increased by 59% in the last 12 months.

In the past, a jump like that would have set off every siren at the Bank of Israel. Yet for some reason, the central bank has been ignoring the signs of trouble for months. Inflation is being boosted by the central bank's expansionary monetary policy (central bank interest rates are at their lowest point ever, 0.5%), the rising cost of fuel, and the government's recent tax hikes.

The June CPI was lifted in part by higher taxes on cigarettes and fuel. Fuel became more expensive in global markets, and this was responsible for a third of the July increase. But come July and August we'll be seeing the impact of the VAT hike from 15.5% to 16.5%, and the impact of "drought tax." Ergo, those indices will be high too.

Fischer is well aware of these developments. He knows the danger of inflation, and does not dismiss it. Also, the central mission of the Bank of Israel, under the new Bank of Israel law, is to keep prices stable.

The thing is that Fischer feels the economy's main problem right now is something else entirely: growth. Rather, its absence - contraction. And while about it, unemployment. To help exporters and their hundreds of thousands of employees, for months the governor has preserving an artificially high exchange rate for the dollar against the shekel.

During interest rate discussions at the end of this month, Fischer will have to decide which of two opposing trends is more important: growth or inflation. He will almost certainly leave interest rates unchanged, but if the inflationary pressures continue in the months to come, he may have to change horses, and start raising interest rates again. And that's before year-end.