January Consumer Price Index Drops Sharply, Exceeding Expectations

The 0.6% fall led by big 7.7% decline in cost of clothing and shoes, although fresh vegetable prices rose 3.8%.

The consumer price index for January fell by 0.6%, the Central Bureau of Statistics reported on Friday, a major drop that exceeded analysts’ expectations.

Particularly large declines were recorded in the category of clothing and shoes, which dropped by 7.7%, and fresh fruit, which on average dropped by 1.3% for the month. The food category of the index – which excludes fresh fruits and vegetables – was down by 0.8%. On the other hand, fresh vegetable prices rose by 3.8%, public transportation costs were 3.4% higher and cigarette prices jumped by 1.5%.

Looking ahead, Bank Hapoalim economists predict that inflation for 2014 will come in at 1.6%, which is slightly under the midpoint of the government’s target range of 1% to 3%.

Economic growth, the bank’s economists say, will be moderate and will not create inflationary pressures. The strength of the shekel will also rein in prices by making imports less expensive, they said. The bank pointed to two factors last year that served to boost prices. One was the increased cost of fresh fruits and vegetables, due to weather-related damage; the other was a hike in indirect tax rates, such as value-added tax.

“The January index shows that there is no inflation problem in Israel, making an additional reduction in the interest rate possible, although it’s not certain that an additional cut would contribute to the [shekel] exchange rate or growth,” said Ilan Artzi, chief investment manager at the Halman-Aldubi investment firm.

“The January index was lower than what was predicted, which was a drop of 0.3%, and was affected, among other things, by a one-time drop in the price of water and for clothing and shoes. Looking ahead, we think the next index [for February] will also be low and expect a drop of about 0.2%, due to the expected drop in fuel prices and the continued decline in prices for clothing and shoes due to the short winter,” a reference to the unseasonably warm and dry winter Israel has been experiencing.

Artzi predicted inflation of under 1.5% for the coming year.

The Leader Capital Markets firm put a damper on speculation over a drop in interest rates, citing rising house price pressures and positive economic signs from the Israeli economy, including an improvement of the country’s export picture, as reasons why rates may not be cut.

Shmuel Ben-Arieh, the director of local market research at Pioneer Financial Planning, saw the tame inflation rate as a negative sign. “The January consumer price index is an indication of what all of us have known: The economy is not in a healthy place. The index indicates a decline in demand by the Israeli consumer and continued economic sluggishness.”

Shoppers packing the Azrieli Center mall in Tel Aviv.
Ofer Vaknin