Israeli Consumer Prices Fell in 2014 for Third Time Since 2003

Decline would have been steeper except for higher housing costs.

Israeli consumer prices fell last year for the first time in eight years and would have fallen even more sharply if it hadn’t been for a sharp rise in housing prices, the Central Bureau of Statistics said on Thursday.

The consumer price index dropped 0.2% in 2014, compared with 1.8% in 2013 and a recent high of 3.9% in 2009, the CBS said. The December CPI registered no change, despite the fact that the shekel depreciated against the dollar. However, not counting home prices, prices dropped a much sharper 1.4%, the CBS said.

Deflation in developed economies is rare, but Israel and many other economies have experienced it this year. In the last decade, Israel has seen its CPI fall only twice – once in 2006 when prices dropped 0.1% and the other time in 2003 when they plunged 1.9%. In those two years, prices fell due to lower rental costs; last year, the decline was much more broad-based.

While consumers may celebrate lower prices, for policy makers it is normally a worry – a sign of an economy in distress, threatening to deter consumer spending as people hold off purchases hoping prices will fall further.

Economists doubt 2015 will see another year of deflation, but inflation will be very low.

“The Bank of Israel failed to achieve its inflation target in 2014,” said Ilan Artzi of the investment house Halman-Aldubi. “It looks like in 2015 odds are good that the Bank won’t meet the target either. The low December CPI shows that like other Western countries Israel has no actual inflation.”

The average forecast of economists surveyed by the Bank of Israel is for inflation of just .096% this year, below the government’s target range of 1% to 3%. The Bank of Israel itself expects somewhat higher inflation, but just 1.1%.

Artzi said the next few months will see further deflation because of falling world commodity prices, most notably oil as well as reductions in the controlled prices of water and electricity.

While economists have been raising their economic-growth forecasts for this year, Uzi Levi, chief analyst at Infinity Investment Group, expressed pessimism.

“The year 2014 ended without inflation, which reflects the mood consumers and businesses as seen in the business tendency surveys and annual Consumer Confidence survey of the CBS,” Levy said. “In other words, 2014 was just a promo for 2015, which saw declining consumption and falling prices.”