Monthly Consumer Price Increase Bucks Trend, Not Seen as Portent of High Inflation

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Israel’s Central Bureau of Statistics, Jerusalem. Credit: Wikipedia Commons

The Consumer Price Index rose by 0.4% last month, the Central Bureau of Statistics announced yesterday.

The expectation had been that the index would increase by 0.5%. But even with April’s rise, the country still finds itself more broadly in a period of deflation. During the period January through April 2016, the price index declined by 0.6%, while over the 12-month period from May 2015 through April 2016, the index dropped 0.9%.

The April index traditionally reflects rising prices as consumers open their wallets for the Passover holiday (although the timing of the festival varies from year to year based on the Hebrew calendar). Last year’s April consumer price index increase was 0.6%, for example, and in 2010 it was as high as 0.9%.

Some of the highest increases last month were registered for clothing and shoes, at 3.7%; motor fuels and oil, 5.2%; vacation accommodations in Israel and abroad, also 5.2%; culture and entertainment, 2.1%; and transportation, 1.7%.

On a more specific level, tomato prices shot up 14% in April, although that salad ingredient increase was offset by a roughly identical price decline for cucumbers.

The April increase breaks a string of unprecedented monthly price declines.

With the exception of October 2015 (when the increase inched up by just 0.1%), every monthly index since August 2015 was in negative territory.

Analysts view the April rise as a sign that we’re in store for a short period of positive price indexes, which they expect to continue for May and June as well. However, they say the increases will be slight – around 0.1% to 0.2% per month.

The experts also expect inflation to be very modest for the coming 12 months – between 0.7% and 0.9% for the entire period. This would be below the government’s inflation target of 1% to 3%.

Over the past few years, the economy has been experiencing deflation. For the year 2014, prices dropped 0.2%; last year, the rate of deflation intensified to 1%; and, as noted, for the 12 months between May 2015 and April 2016, consumer prices dropped by 0.9%.

By contrast, for those buying a home, spiraling housing prices have been a major concern for years as the government has tried various policies to boost supply. Home prices for the period from February through March rose 0.4%, continuing a nearly constant trend that has been registered ever since the current government took office in March 2015.

In total, home prices have increased by about 7% over the past year.

In its summary of home prices for the first quarter of the year, the Central Bureau of Statistics reported that the average home was purchased for 1.42 million shekels ($377,000), compared to 1.37 million shekels a year earlier. By comparison, at the end of 2008 the average home price was just 766,300 shekels.

Despite overall inflation figures that are consistently coming in under the government’s target range, the Bank of Israel is making no noises indicating that it plans to take steps in the foreseeable future to nudge inflation into the target range – a target that is enshrined in Bank of Israel law.

Although consumers may see falling prices as good news, falling prices also present the potential for damage to economies – for example, if manufacturers cease to be able to turn a profit at prevailing prices, or if consumers hold off spending in the belief that prices will continue their downward trajectory. That in turn can result in higher unemployment.

The dominant expectation is that the Bank of Israel will not adjust its interest rate, apparently until the end of the year, from the current historically low rate of 0.1%. That’s not only because of the conservatism of central bank governor Karnit Flug and her colleagues, but also because the Bank of Israel has very limited means at its disposal to have an impact.

Some economists are suggesting that at the same time the next government budget is being prepared, the fiscal and monetary system should have been looking for ways to act in unison to encourage sustainable economic growth of 4% to 5%, including growth engines to jump-start the economy.

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