Israeli Consumer Prices Take Surprise Turn Lower

November CPI fell 0.4%, far steeper than economists had forecast.

Moti Bassok
Moti Bassok
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VegetablesCredit: Reuters
Moti Bassok
Moti Bassok

Israeli consumer prices took an unexpected dip lower in November, deepening the deflationary trend that set in this year, but economists said they didn’t take price trends as a warning of economic malaise.

The Central Bureau of Statistics reported Tuesday that the consumer price index fell 0.4% last month, a much bigger drop than economists had forecast, which ranged from minus 0.1% to no change. The November CPI means that prices have fallen 0.9% this year, or 1.6% discounting the impact of housing prices.

Deflation is often a sign of an economy in distress, but economists have said they aren’t concerned, pointing to a host of factors such as the October reduction in the 18% value-added tax and falling global commodities prices. They did not point to flagging consumer demand.

“Although the inflationary environment for the last 12 months is still negative, we believe that it has been the impact of one-time changes in prices and falling world petroleum prices,” said Boaz Tzaliah, CEO of the investment house Top Alpha. “In the medium term, the inflationary environment will resume being positive.”

Guy Yehuda, senior economist for research and strategy at Psagot Investment House, agreed. “This isn’t bad news for the Israeli consumer,” he said. “On the contrary, falling prices put more disposable income in the consumer’s pocket, which in turn is directed to more consumption.”

Consumer spending figures suggest that this is exactly what is happening. Consumer spending rose at a 2.4% annual rate in the third quarter, a factor that helped lift the economy out of a funk in the second quarter when growth slowed to almost nil.

For that reason, economists said they doubted the Bank of Israel would act to lower its base lending rate, which has been at a record low 0.1% since February. Yehuda said Bank of Israel Governor Karnit Flug’s main concern now was navigating monetary policy at a time of uncertainty.

“The CPI isn’t expected to change the Bank of Israel’s stance, which like many central banks around the world is in a waiting period,” he said, adding that a key gap was not yet clear. On one side is expansionary monetary policy in Europe; on the other side is the normalization expected to begin Wednesday in the United States and its impact on the Israeli economy, the shekel and the financial markets.

On Tuesday, the U.S. Federal Reserve began a two-day meeting at which it is expected to raise its key rates. The decision will be released Wednesday at 2 P.M. Washington time, with markets prepared for an initial 25-basis-point “liftoff.” In recent weeks, the European Central Bank has expanded its program of quantitative easing.

The statistics bureau said the biggest decline in November consumer prices was a 2.4% drop for fresh fruits and vegetables. Prices for culture and entertainment dropped 1.2% and food 0.8%.

Meanwhile, housing prices continued rising despite government efforts to bring them down by measures such as higher taxes on property investors. The stats bureau said home prices climbed 0.8% in September-October, reflecting an annualized rise of 7%.

But the latest round of home-price rises suggests that the government’s belief that investors are artificially inflating prices is proving wrong. It suggests that the real source of rising demand and prices are people moving up to bigger and better homes and first-time buyers.

With reporting by Arik Mirovsky.

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