Israeli Prices Fell in January, the Steepest Drop Since 2006

Consumer price index declined 0.9%, but economists doubt Bank of Israel will cut its record-low lending rate further.

Ilan Asayag

Israeli consumer prices dropped 0.9% in January, their biggest monthly decline since September 2006, but while economists say they expect more deflation ahead, most doubt that the Bank of Israel will lower interest rates.

Figures from the Central Bureau of Statistics released Sunday showed a sharp  8.9% drop for water and sewage, whose government-controlled rates were cut in January. There was an 8.8% tumble for energy prices, which have been decreasing in line with the fall in global petroleum prices.

The January figure, which was affected by the statistics bureau's rejiggering of the consumer price index, brought the price decline over the last 12 months to 0.5%. In January, apparel and shoes fell 6% and communications and transportation 1.9%. Food prices were down 0.2%.

Although falling prices often signal an economy in distress, economists said Sunday that Israeli deflation mostly reflected other factors like government-controlled prices and the drop in global energy prices.

Prof. Michel Strawczynski, who teaches at the Hebrew University, said that excluding energy prices the CPI rose 0.1% in the 12 months through January. He saw no sign that the economy was entering a slowdown or a deflationary spiral.

"If this were coming from the demand side [consumers], the Bank of Israel would have to lower rates to increase it, but because all the changes have been on the supply side, the need to respond is lower,” he said. “Also, we can’t be certain that the changes in world oil are permanent.”

Ori Greenfield, chief economist and macro-strategist at Psagot Investment House, said the low-inflation environment reflected not just falling world oil prices but increased competition in many industries such as food and travel, as well as the impact of government reforms and price cuts.

The February CPI will also likely be negative because electricity rates are due to fall 10% at the start of the month, but longer-term consumer prices will stabilize. World oil prices have leveled out and the reforms and competition that brought prices lower in 2014 won’t continue into 2015 at the same rate.

Greenfield said the Bank of Israel would have to decide between two opposing trends. On the one hand, the economy is showing signs of recovery from last year’s slowdown, which would militate against a rate cut. On the other, inflation is very low and the shekel has been strengthening.

On Friday, the latest day of foreign currency trading, the dollar lost more than 0.25% against the shekel to 3.883.

“Nevertheless, we believe that the Bank of Israel will first exhaust the tool of forex-market intervention before it decides to reduce the [interest] rate another time,” Greenfield said.

But some economists said the central bank might act as quickly as the next meeting of its monetary committee on February 22 and 23. The bank’s base rate is at a record low 0.25%, but the bank may pare it to 0.10%.

Ofer Klein, chief economist at Harel Finance & Investment, noted that the central bank had to weigh not just inflation, or its absence, but the currency wars now erupting in Europe, with central banks cutting their base lending rates and launching quantitative-easing programs.

“Quantitative easing in Europe and the strengthening of the shekel puts the ball back in the Bank of Israel’s court and we believe increases the chances that the Bank of Israel will step up purchases of foreign currency and/or seriously consider lowering rates at its next meeting,” Klein said.