January Consumer Price Index Declines by 0.2%, but Poor Hit by Food Inflation

Among the segments of the index contributing to the drop were clothing costs, which were 8.5% lower; shoes, down 7.4%; cellular phone service, down 2.4%; and hotels and other guest accommodations, which declined 5.9%.

The consumer price index for January dropped 0.2%, the Central Bureau of Statistics announced Friday. Over the past year, the price index has risen by a modest 1.5%.

Among the segments of the index contributing to the drop were clothing costs, which were 8.5% lower; shoes, down 7.4%; cellular phone service, down 2.4%; and hotels and other guest accommodations, which declined 5.9%.

Among components of the consumer price index that showed increases in January were fresh vegetables, up 12.6%; water and sewage, which was 2.8% higher; cars, up 0.7%; and dairy products, the price of which increased overall by 0.7%.

If fruits and dairy products were excluded, the January price index would have declined by 0.3% rather than 0.2%. Health services rose by 0.4%.

The index for January was developed using a new formula in which the mix of factors through which the cost of living is calculated was changed. As a result, the January index not only reflects changes in prices over the past month, but also the new method through which it was calculated.

The Central Bureau of Statistics issued a separate report on prevailing home sale prices, which reflect the cost of buying a home rather than maintaining one that is already owned. ‏(See separate story on this page.‏)

The negative January index follows generally low inflation in recent months: a 0.2% increase in December, a 0.5% drop in November and a 0.2% drop in October. The current situation appears to be a reflection of a drop in demand on the part of the public due to the prospect of government spending cuts and tax increases once a new government is put in place.

One of the glaring findings in the January consumer price figures is the relatively low impact of inflation on the mix of items that the top 20% of the population generally spend their money on, and the higher increases for the mix on which the poorest 20% spend theirs. For the top 20%, the January price index dropped 0.3%, while for the poorest fifth it did not drop at all. It remained unchanged.

Over the past 12 months, the index for spending patterns among the wealthiest 20% rose 1.4%, while it was up 1.2% for the poorest 20%, due to the more significant price increases on basic items, including food, which constitute a larger portion of the household budget of the poor.

The market was anticipating a drop in the index for January, said Joseph Fraiman, CEO of Prico Risk and Investment Management, but the fall was a bit more than expected. “The drop in the index reflects the slowdown in economic activity,” Fraiman said. “The retreat of imports and exports in recent months, along with the price index figures, show the added caution that the Israeli consumer is exhibiting. The decline in demand in the economy causes additional harm and furthers the falling potential for Israeli economic growth.

“The drop in clothing and shoe prices, cellular services, housing service costs to property owners and [the cost of] hotel vacations shows that the public feels threatened and prefers to limit its obligations and cut expenses,” Fraiman added.

The next government, which is in the process of being formed following last month’s election, will have to devote special efforts to the issue of the cost of living and the continued effects that living costs are having on the middle class, Fraiman said, noting that the middle class “is the driving force for demand and encouraging local consumption.”

Ronen Menahem, who heads the strategy and investment department at Mizrahi Tefahot Bank, said the January index figures show that after a one-month pause, prices have continued to decline more than had been anticipated. On the other hand, Menahem thought the Bank of Israel was “a bit less bothered” by the economic situation in general and was directing its attention specifically to the large state budget deficit and the rise in housing prices. Menahem said the sense at Mizrahi Tefahot was that the Bank of Israel would not lower the interest rate for March.

“The January index was at the lower range of the forecasts, in a direct extension of the zero inflation trend of recent months,” said Yaniv Pagot, the chief strategist at the Ayalon Group. “The indexes for February and March 2013 are expected to be similar, meaning negligible inflation.”

Nonetheless, Pagot concurred that the Bank of Israel would not lower interest rates further, in part due to concern over a rise in housing prices and in light of the stabilization of global markets.

Referring to Bank of Israel Governor Stanley Fischer’s plans to step down at the end of June, Pagot said: “Based on the existing data, there is a high probability that the bank governor will not lower interest rates for the remainder of his term. The more that time passes, there are more and more indications that the steps the Bank of Israel has taken to cool the housing market is not producing the appropriate results, and there will be a need for combined efforts to increase [housing] supply on the government’s part, and policies to restrain [prices] on the part of the Bank of Israel to head off a real estate price bubble.”

Tomer Appelbaum