Deflation? Go to the Grocery and See for Yourself: Prices Are Higher

Actually, it's true: the basket of prices fell. But food, vegetable and cellular prices increased

Don't believe the index. The Central Bureau of Statistics can crunch numbers to its heart's content, but just about everybody will tell you: "Prices keep climbing. Go to the grocery and see for yourself."

It's human nature to notice the bad news (price hikes) and to ignore good news (lower prices).

Note that costs outside of our line of sight, such as electricity, and the price of housing, dropped in 2006. But prices we see every day at the grocery rose. Food, fruits, vegetables, and the price of cellular communications rose by 4%, to the generat ire.

So one might think the index is a lie. But it isn't, of course. Statistically, the average basket of products dropped in price.

People tend to exaggerate. The CPI dropped by 0.1% in 2006, leading to an outcry that the central bank missed its target by a mile.

But the truth is, it isn't that bad. Yes, it's true - it would have been better had inflation been 1% instead of -0.1%, but it would have been much worse if inflation had deviated upwards.

All in all, the wider public benefits from the negative inflation rate.

All employees, every stipend recipient benefited, because their salaries and stipends maintain their buying power month after month - no small thing.

Mortgage borrowers and inflation-linked debtholders profit because their monthly payments during 2006 remained unchanged - also a big advantage.

So what's the problem with a negative index?

That there was a substantial drop in prices in certain sectors, furniture and home appliances, for instance. Employers in these sectors would like to reduce salaries as well, to make up for the loss in revenue, but they cannot do so because of the downward inflexibility of salaries.

As a result, lacking other alternatives, these manufacturers reduce production, i.e., reduce activity in the sector - not a good thing for growth or employment. But if we look at the economy's macro results, it appears that 2006 was a year of fast growth (5 percent) and decreased unemployment. That is, the results were good, so that the negative inflation had almost no negative effect.

At the same time, it's true that the governor of the Bank of Israel, Professor Stanley Fischer, missed his mark. He increased interest rates and maintained them at too high a level. Only in November, when it was too late, did he begin the reduction process. Fischer was right to increase interest rates only once, during the month of the war. It was justified in light of the damages to the the economy and large defense expenses. But as soon as the war was over, after it became clear that concerns were excessive and the economy returned to full function, he should have decreased interest rates immediately, and by a lot. But he waited two months too long.

We recall that Alan Greenspan hurried to reduce interest rates at a quick rate after the terror attacks of September 11, 2001. But Fischer was fearful. Perhaps in 2007 he will fear less.