Don't believe the index. Just about everyone these days is saying that the Central Bureau of Statistics can publicize what it likes, "but as far as I can see, prices are only going up. Go to the grocery store and see for yourself".
It's sort of our nature to notice only the bad news (price increases). And the good news (lower prices), we ignore.
Moreover, there really was an interesting phenomenon in 2006. Costs outside of our direct line of sight, such as electricity, and the price of housing, were lower, but prices we see every day at the grocery store, actually rose. Food, fruits, vegetables. And the price of cellular communications got 4 percent more expensive - and infuriated everyone. So it is only reasonable to hear that the index is deceiving. But it isn't. The average basket of products, actually became less expensive.
We see everything in extremities. A decrease of 0.1 percent since last year is greeted with cries, as though this were a huge miss and an enormous problem. But the truth is, it's not really that problematic. Yes, it's true - it would have been better had inflation been 1 percent 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 in the economy, every stipend recipient benefited from it, because their salaries and stipends maintain their buying power month after month - no small thing. All mortgage holders and inflation linked debt holders 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.
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