Inflation hits price stability target range

Inflation is alive and just where it should be, according to the latest figures from the Central Bureau of Statistics. The consumer price index climbed by 0.4% in May, which was in line with economists' expectations. Going back 12 months, the increase in prices tracked by the CPI has been 2.8%, which is right within the range defined as "price stability."

It is the Bank of Israel's job to keep inflation within the range of 1% to 3%, a target range it tends to miss.

However, individual components of the index showed wide deviation. The sub-index of fresh fruit prices increased by 14.6% in May 2009, even as the price of fresh vegetables dropped by 3.8%.

Clothing prices increased by 1.5%, but footwear decreased by 1.5%, the Bureau's figures show.

The Bureau has been breaking down the changes in consumer index by demography, meaning - how the broad changes affect specific population groups. It found no great difference in the month of May: Looking at the poorest 20% of the population, the Bureau found that the CPI rose by 0.4%, compared with 0.3% for the 20% wealthiest segment.

However, a gap opens when looking at the index over the last 12 months. For the poorest 20% of the population, the CPI rose by 3.3%, compared with 2.4% for the 20% wealthiest. In other words, for the poor, prices aren't stable.

The fact that the CPI has been ramping up is ostensibly good news, because it indicates that demand is returning and, therefore, so is economic activity. Evidently, manufacturers feel comfortable raising prices again.

At the moment, however, the inflation we see is being associated with supply, meaning that it's due to rising prices of commodities and raw materials, rather than rising local demand for goods and services.