Analysts see overall deflation in 2015

According to data released by the CBS, the Consumer Price Index has fallen 1% over the past 12 months, and 1.3% since the beginning of the year.

April 16, 2015 20:39
2 minute read.
Tel Aviv stock exchange

Tel Aviv stock exchange. (photo credit: REUTERS)

Some financial analysts predict that Israel's overall inflation level will remain negative in 2015, though they don't see a deflationary spiral.

According to data released by the Central Bureau of Statistics on Wednesday, the Consumer Price Index (CPI) has fallen 1% over the past 12 months, and 1.3% since the beginning of the year. March's CPI increased by 0.3% increase, less than ,4% the market expected. Some of the expected increase was 0.25% attributable to a NIS 0.38 increase in the per-liter price of fuel. The increases in government linked bond prices in recent days reflected expectations that the CPI would rise even more than the forecast.

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Some economists, including Governor of the Bank of Israel Karnit Flug, believe that inflation will revert to the target range of 1-3% within a year, to which the Bank of Israel is committed by law. The Bank of Israel therefore chose to leave the interest rate unchanged in April, after cutting it to a historic low of 0.1% on February 23.

But others feared that deflation would persist through the end of the year.

"Structural factors and regulatory pressure to lower the cost of living, which is expected to be renewed by the new government, will add to a low-inflation environment in the coming year," an analysis by IBI investments noted. "we estimate that the annual rate of inflation will remain in negative territory throughout the whole of 2015, while in the next 12 months inflation is expected to amount to about .5%."

The Infinity Group estimated prices for the year would fall .1%.

Though a temporary fall in CPI could be good for consumers, there is also risk that an economically damaging "deflationary spiral" will set in. Such a spiral occurs when markets come to expect prices to fall, giving people an incentive to delay consumption. That cuts short profits and can lead to wage decreases, which further reduce consumption. Such a spiral is difficult to break, especially if tools such as the interest rate are already at record lows.

Fears that inflation won't get back to its target range could lead BOI to uncharted territory, quantitative easing and negative interest rates.

Excluding housing, the CPI has fallen 2% over the past 12 months. Prominent decreases in March include fresh vegetables (4.2%) and laundry, cleaning, and insecticide materials (3.7%). The most prominent rises were in fuel and car oil (6.2%) and fresh fruit (1.7%).

The CPI tumbled 0.9% in January and 0.7% in February, but Bank of Israel economists asserted that the falls were attributed to 10% cuts in water and electricity rates, not to slower demand in the economy or a slide into recession.

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