Israel Marks Third Year of Lower Prices as CPI Drops in 2016

With economy and wages buoyant, lower prices helped spark a consumer spending boom last year.

Bank of Israel Governor Karnit Flug.
Emil Salman

For the first time in the country’s history, Israel ended 2016 with a third straight year of falling prices, the Central Bureau of Statistics said on Sunday.

The consumer price index dropped 0.2% in 2016, following declines of 1% in 2015 and 0.2% in 2014, the CBS reported.

The Bank of Israel said in response that it expected inflation to return in 2017, and that the annual pace would probably reach the middle of the government’s target range of 1% to 3% annually by the end of the year.

Negative inflation, traditionally a cause of concern for economists because it can signify weak demand and deter people from spending and businesses from investing, has not had a negative impact on the Israeli economy, which grew a preliminary 3.8% last year.

Instead, falling prices have been accompanied by rising wages and buoyant consumer demand, which expressed itself last year with a surge in automobile purchases – most of it financed with low-interest loans – and overseas travel. Consumer confidence has been high, although the central bank sees economic expansion slowing this year to 3.2% and to 3.1% in 2018.

Over the course of 2016, consumers enjoyed a 1.5% decline in food prices, following a 0.1% decline in 2015. Fresh produce prices fell 2.7% but still remain higher than two years ago due to a 13.2% spike in 2015.

Furniture and home appliance prices dropped 2.4%, following a 1.6% decline in 2015, while clothing prices dropped 1%, adding to a 1.7% decline in 2015.

But there were some exceptions to the rule. The cost of maintaining a home showed an unexpected rise of 1.4% for the year, while health costs climbed 0.8%, following a 0.3% drop the previous year. The education, culture and entertainment price index rose 0.7%, after falling 0.8% in 2015.

The housing price index – which lags the rest of the CPI by a month – was up a sharp 8.1% on average in October-November, compared with the same two months in 2015. However, the pace of housing price increases slowed in the two months to just 0.4% higher on average than the average of September-October 2016.

Rather than tepid demand, Israeli deflation has been caused mostly by external factors, the Bank of Israel explained in a statement yesterday.

“It’s the result of low global inflation and a sharp decline in energy prices, administrative reductions in prices by the government, an appreciation [of the shekel], increased competition and consumer awareness,” the central bank said.

Bank of Israel Governor Karnit Flug has been trying to weaken the shekel against the dollar in order to make Israeli exports competitive. But despite regular intervention in the foreign currency market, the shekel actually gained close to 1.5% against the dollar last year.

One reason is strong economic growth and a large current account surplus. Another is that even though Israel’s base lending rate is at a record low of 0.1%, it is high by developed-country standards – which attracts funds.

Nevertheless, the bank took credit for its policies on Israel’s low unemployment rate, economic growth and, especially, its decision not to adopt “unconventional” monetary policies that might have given inflation a lift into the target range but entailed risks.

Finance Minister Moshe Kahlon was meant to hold his first press conference in several months on Sunday, to highlight his 2016 achievements, but the event was canceled over what officials called unspecified scheduling problems.