Inflation Slows - but Not for the Poor

Poor spend a much larger percent of their income on basic goods which have risen faster than many higher priced items.

The consumer price index for October rose by only 0.1%. Since the beginning of 2008 inflation has reached 4.5% and is running at 5.5% for the last 12 months, the Central Bureau of Statistics announced last Friday afternoon.

In light of the small increase, the governor of the Bank of Israel, Stanley Fischer, is expected to lower interest rates once again, by 0.25% on Tuesday of next week.

Only on Tuesday of last week Fischer made a surprise, unscheduled interest rate announcement, lowering rates by 0.5%, to their present 3% level, and yet a further decrease would bring them down to 2.75%. This would mean rates will have dropped by 1.5% in only two months, October and November.

These expectations were significantly strengthened at the end of last week when Ben Bernanke, the chairman of the U.S. Federal Reserve, hinted of another possible worldwide reduction in interest rates.

As to Israeli inflation, while the CPI may have only risen 0.1%, the poor did not feel any drop in inflation. October price increases for the poorest 20% of the population were actually 0.5%, and inflation so far this year is running at 5.2%. However, for the wealthiest 20 percent of the populace the October CPI was 0.0%, and so far this year totaled 4.2%.

The reason for the difference is that the poor spend a much larger percent of their income on basic goods such as food, fruits and vegetables and public transportation, which have risen faster than many much higher priced items such as cars and communications.

While inflation looks to be slowing down in the face of the world economic crisis, the CPI for the July to October period rose at an annual rate of 5.8%, well beyond the cabinet and Bank of Israel's 2008 inflation target of 1 to 3%.

Your wallet took the biggest hit in October from increases in fruit and vegetable prices, at 11.7%; overall food prices, 10%; and housing up 7.6%.

On the down side were hotel prices, 5% lower; fuel and oil, down 4.7%; fresh fruits, 3%; cars, down 1.6%; and entertainment and culture, 1%.

Specific food items which went up in price were rice, 4.4%, and fresh poultry, up 3.2%. Frozen poultry actually dropped 1.3%. Tomatoes shot up 31.3% and kiwi 20.5%. Lemon prices fell 31.4%, oranges 20.7% and cucumbers 18.7%, all mostly seasonal changes.

In response to the October CPI news, the Manufacturers Association called on Fischer to continue lowering interest rates and for the cabinet to implement an economic program to return confidence to the markets and prevent a slide into a recession.

Uriel Lynn, the president of the Israel Chambers of Commerce, claimed the moderate rise in the October CPI reflects the slowing down of inflation due to fears of a recession. He said this allows Fischer to again lower rates.

The head of the Lahav organization of self-employed, Yehuda Talmon, said inflation is no longer the main enemy facing the Israeli economy, as we are entering a period of deflation. Instead, the most dangerous problem is recession, and he also demanded further interest rate reductions.