The consumer price index for September dropped by 0.3%, a larger drop than expected by many analysts. If housing costs were excluded, the price decline for the month would have been 0.5%, signaling that the country may be drifting toward longer-term deflation.
Since the beginning of 2014, the price index has dropped by 0.3%, but if housing costs are excluded the decline is a much more dramatic 1.4%. Over the 12 months since September 2013, the consumer price index is down by 0.3%; without housing costs it’s off by 1.2%. The formal government inflation target is a range between 1% and 3%, so in practice, at -0.3% over the past year, inflation is running at 1.3% below the bottom limit of that range. At the end of September, the Bank of Israel forecast inflation for the 12 months ending September 2015 at 1%, but there are indications that it will likely fall short of 1%.
The prospect of long-term deflation – negative inflation – is a byproduct of slowing economic activity. It in turn puts a damper on investment and is dangerous for a country’s economy. In Israel’s case, price declines despite rising housing costs and a drop in the value of the shekel are in part the result of a decline in consumer purchasing power and concerns over the future of the local economy. The drop on a global basis in the price of fuel, food and other commodities also serves to tamp down prices in Israel.
The threat of deflation can be dealt with by the government through adjustments in the 2015 government budget and in the country’s monetary policy, but, arguably, the longer the issue is put off, the more painful the process will be. It appears, however, that the Bank of Israel will wait one more month to get a better look at trends before deciding whether to further adjust its rock-bottom 0.25% interest rate or take other policy measures.
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