Inflation in Israel seems to be galloping a lot faster than had been realized. The consumer price index jumped 0.9% in June 2009, shocking economists who had expected an increase of 0.5% at most. The surprising leap could well induce the Bank of Israel to raise interest rates at month-end, from their historically low point of 0.5%. If it does, it would be sooner than most pundits had expected.
From the start of the year, the CPI has risen by 2.1%, which ostensibly places inflation smack in the middle of the price stability target range. But trend data paint another picture.
The government-set target range for inflation is 1% to 3%, and it's the Bank of Israel's job to keep inflation within that range. Usually, in any given year, inflation runs either higher or lower. When looking at inflation over March to May, we find an 0.5% increase in March, a 1% leap in April and a 0.4% jump in May. Adding the June figure to that and extrapolating to the trend, we reach annualized inflation of 4.8% between March and June, which is well beyond the Bank of Israel's target range. And what that means is that inflation is higher than had been thought.
The main factor pushing up the June index was a 12% increase in the price of footwear, a 13.5% leap in the price of soft white cheeses and dairy desserts, a 10% increase in the price of fuels, and a 2.6% increase in the price of transportation and telecommunications.
On the other hand, the price of fresh fruit fell by 7.7% and the price of fresh vegetables fell by 3.9% in June, compared with the month before.
Among the vegetables worthy of note is corn on the cob, which fell by 17%. Watermelons and other melons stood out with a 35% drop in price.
In early July, Bank of Israel Governor Stanley Fischer explained at an economic conference why inflation is raising its head again. "As long as [economic] growth is slow, inflation isn't likely," he told the audience.
That's the theory. But in Israel, prices for consumers were automatically jacked up because the government hiked VAT by 1% to 16.5%, and now means to sharply increase the price of water (through the so-called "drought tax").
These increases aren't inflation per se: what they are is simply an increase in prices because of regulatory action, Fischer explained.
However, if the increase seeps into other areas, action will have to be taken, Fischer added.
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