Economic Slowdown Brings Low Inflation

December CPI surprises with 0.2% rise.

The December consumer price index rose 0.2%, defying the consensus among analysts that it would move by less, if at all. This brought the overall rate of inflation for 2012 to 1.6%.

Real estate prices continued climbing last month, according to statistics bureau data.

The housing index rose 0.4% in December, and a comparison between real estate transactions in October and November and those in the previous two months point to a 1.1% increase in housing prices.

A year-over-year comparison with the parallel two-month period shows a 5.7% increase in prices in 2012.

"The real worrisome figure in the December index is the sharp 1.1% increase in the price of homes for sale after rising a cumulative 1.5% the previous two months," said Yonatan Katz, chief economist at Leader Capital Markets.

If this continues, he said, it will make it hard to lower interest rates despite signs pointing to an economic slowdown.

"Inflation in 2013 will reach 1.9%, mainly because of a rise in the price of electricity (24%) despite the flow of natural gas, along with higher municipal taxes, food prices, and water prices," said Ofer Klein, chief economist at Harel Group.

Most analysts expect a moderate increase in the index in 2013, from 1.5% to 1.7% - less than half of the 1% to 3% inflation target range of the Bank of Israel and the government for this year.

Despite the December figures, analysts believe the Bank of Israel will decide at the end of this month to leave its rate for February unchanged from the current 1.75% after having lowered it last month from 2%. It is generally expected that the central bank will wait another month before deciding whether to lower its rate by another 0.25% based on global developments as well as price movement in Israel's housing market.

Clothes cost more

The Central Bureau of Statistics also announced that while cigarettes and chicken cost more last month (going up by 21% and 10.8%, respectively), the price of produce went down.

The cost of household electricity rose 8.8% in December, gasoline went up 5% and overseas flights cost 4.9% more.

The price of clothing and footwear jumped 10.5% in December.

Food items that were more expensive in December included dough and frozen dough products (7.6%), crackers (3.2%), pasta (3.1%), mayonnaise (2.4%), dairy products (2.1%) and processed fruits and vegetables (1.9%).

"The index doesn't reflect what Israeli citizens feel in their wallets," the social protest group Israel Yekara Lanu said in a statement last night. "Since the value-added tax was raised in August we have been subject to an onslaught of price hikes, but the index doesn't reflect the fact that the basket of goods has shrunk and the bill has just gotten larger."

Meanwhile, cucumbers and tomatoes were 27% and 19% cheaper respectively, while fresh fruits and vegetables were 3.2% cheaper overall. Other foods that dropped in price included cheaper frozen fish (2.5%), jam (2.5%), wine (2.2%), chocolate (1.4%) and pork (1.2%).