November Consumer Price Index Surprises With 0.5% Fall, Interest Rate Drop May Follow

The major drop was a surprise to analysts.

The consumer price index dropped by 0.5% in November, the Central Bureau of Statistics reported Friday. The major drop was a surprise to analysts. The absence of price pressures strengthens expectations that the Bank of Israel's monetary committee could decide late this month to lower its base interest rate for January from 2.0% to 1.75%.

Lower overall consumer prices were the result in part of the strengthening of the shekel against the U.S. dollar and a drop in the cost of fuel. Particularly major declines were recorded last month in the price of fresh fruit and vegetables (10.7% ), car fuels and lubricants (4.3% ), culture and entertainment (1.3% ), and communications and transportation (1.3% ).

They were offset in part by significant increases in the cost of clothing and shoes (3.7% ) processed fruit and vegetables (1% ) and in the general food category, which excludes fruit and vegetables (0.8% ). Rental rates declined by 0.4%.

The official target range for inflation is 1% to 3%. The expectation is that for the year 2012 as a whole, the consumer index will rise by less than 2%, well within the desired range. On an annualized basis, inflation between August and November ran at just 1.1%. Analysts are projecting inflation for the next 12 months at between 1.7% and 2.1%.

Due to the absence of inflationary pressures over the past month and in light of the slowing pace of economic growth in the past few months, the expectation is growing that the Bank of Israel's monetary committee will act as early as the end of this month and lower the base interest rate for January to 1.75%.

If the committee members act now, they would be choosing not to wait to see the extent to which curbs the banking commissioner put on home mortgage lending to cool demand have been effective.

Avi Simhon, from Hebrew University of Jerusalem and until recently senior economic adviser to Finance Minister Yuval Steinitz, does not think the low November price index is a sign of a slowdown in the economy. "In November, there was a sharp seasonal drop in [the price of] fruit and vegetables," he said, "and there were other one-time changes that don't indicate a new direction for the economy."

Simhon said inflation over the past 12 months has been 1.4%, adding that the weakening of the dollar against the shekel in recent months was now keeping inflation low, just as it fueled inflation here when the greenback was strong.

The weakening of the dollar, Simhon added, followed the standoff with Iran over its nuclear program (after it became clear that no immediate military strike against Iran was in the offing ).

"At the same time, world energy prices are falling," he said. "The drop in the dollar and energy prices, combined, account for a half-percentage point drop in the [consumer price] index. The dollar has returned almost to the situation before the story with Iran and maybe will drop further.

"The Israeli economy is growing at a 3% annual rate," Simhon added. "In 2013, it will grow at this rate and maybe even faster because of natural gas," he said, referring to the anticipation that production at the Tamar offshore gas field will begin in the first half of the year. "If nothing unusual happens next year in the world or in Israel, we are heading in a positive direction."

Alex Zabezhinsky, the chief economist at DS Investment and Securities, sees the November consumer price index decline as the product of a combination of two factors - the slower pace of economic growth and increased competition. "The low November price index is not happenstance," he said. "This is the third occasion in recent times that the index has surprised the forecasters by going down. And this time it was a particularly major decline."

"Every month," Zabezhinsky added, "we are seeing one or another kind of unusual phenomenon in a particular component of the consumer price index, causing a surprising decline in the index as a whole. However, things accumulate and the overall direction is clear."

Referring to the 0.8% increase last month in the price of food, excluding fruit and vegetables, the DS Investment economist said the increase was still less than expected. Although the supermarket chains had announced price increases, the retailers didn't pass along all of the price hikes they themselves faced after manufacturers raised their own wholesale pricing.

Zabezhinsky attributed this to competition among the retailers and a decline in the spending power of consumers. "The competition is also reflected in November when it comes to cellular service prices, which declined by 2.4%," he added. "Operation Pillar of Defense also affected the index," he noted, referring to last month's military operation against Hamas and its allies in Gaza, which was accompanied by intense rocket fire into Israel from the Strip. "The good thing is that the economy got out of the slowdown, and major competition will continue to keep prices down," he said.

Higher interest rates tend to depress the demand for mortgages. Zabezhinsky added that due to the continued rise in the price of housing, he does not believe the Bank of Israel will lower the interest rate. (With assistance from Arik Mirovsky )

Ofer Vaknin