One only has to look at the sales ads in the weekend newspaper on the deals for new cars to discern that there is a big gap between newspaper reports and the situation on the ground.
Car and appliance salesmen in recent months have bemoaned the depreciation in the shekel, contending that it has "forced" them to raise their prices. Most of the media went along, reporting in alarming headlines that "appliances will cost 10 percent more and cars 15 percent more." And the public started to believe, that contrary to all logic, that dealers would really raise prices, despite the heavy recession and high unemployment.
But as the big Passover ads and the February consumer price index indicate, the rise in the price of cars and appliances was insignificant and almost all other items included in the index did not go up either. It was all tall tales by salesmen, who basically wanted to make us rush to their stores.
The only prices that pushed the CPI up substantially were those for the cost of housing, which is still dollar-linked. In January's CPI of 1.1 percent, housing contributed 0.7 percent to the CPI; in February's 0.8 percent rise, it also contributed 0.7 percent to the CPI. In all, 88 percent of the rise in the past two months was due to this one item in the index.
Therefore, there is no need to get excited about the fact that the index for the first two months of the year rose by 1.9 percent, nor does it make sense to give it too much weight in terms of affecting the year's inflation target of 2-3 percent. Because just as the CPI has gone up, it will go down as the impact of the shekel devaluation is absorbed in the market. So, we're not talking about inflation here, because inflation means a constant rise in prices, month after month. This is just a one-time adjustment to the devaluation.
The proof is that economists continue to project annual inflation for 2002 at no more than 3 percent - still within the government target for the year.
Will Bank of Israel Governor David Klein raise the key interest rate next week?
Economic "experts" predicted the February CPI would be 1.1 percent, but it only rose by 0.8 percent. Furthermore, Klein tends to insist that he adjusts the rate in line with long-term inflation projections and these have not changed. In addition, there is the security situation which has increased the level of instability, the large deficit expected in the 2002 budget, and the battle between the treasury and the governor over the creation of a council of governors at the central bank.
Finance Minister Silvan Shalom proposed a law to create such a council after Klein raised interest rates by 0.6 percent a month ago. Klein knows that a repeat performance this month would be tantamount to waving a red flag in front of Shalom.
Klein also knows that a low interest rate and high dollar is good for business. They are two conditions that encourage economic investment, growth and employment. It's true that the interest rate in the long term is influenced by the size of the deficit, but in the short term it is influenced by Klein. Therefore, there is good reason to expect Klein won't raise the rate for April.
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