The Consumer Price Index does not reflect the real cost of living as experienced by Israeli households, according to a study by Prof. Benjamin Bental and Dr. Labib Shami on behalf of the Taub Center.
The research shows that excluding the cost of money, meaning the interest households pay on mortgages and consumer credit, from the index leads to an underestimation of the economic burden on households.
Israel's index, as is customary in most countries, measures the prices of a basket of consumer goods and services. The owner-occupied housing component, which accounts for 18% of the index, relies on the "imputed rent" approach. This is a hypothetical estimate of the rent homeowners would pay if they were renting their homes.
The method ignores housing prices and financing costs, which directly affect mortgage repayments and household cash flow. A calculation that includes the cost of housing financing shows that the spike in mortgage interest rates is a main driver of the actual increase in housing costs.
The researchers developed a complementary index in which the owner-occupied housing component is not calculated based on imputed rent, but according to actual housing financing costs. This complementary index responds strongly to changes in financing terms, especially in 2022 and 2023, when the Bank of Israel sharply raised interest rates.
The researchers emphasize that the study does not seek to undermine the validity of the index as a tool for measuring inflation or to suggest it needs to be replaced, but the lack of reference to the cost of money creates a severe gap.
They recommend publishing indices alongside the official index that take financing costs into account, in order to provide a more realistic and comprehensive picture of the economic burden on households.