The Consumer Price Index for December, released today (Friday) at 14:00, remained unchanged, in stark contrast to earlier predictions of analysts, who predicted a rise of at least 0.3%. The annual inflation rate for 2009 therefore stands at 3.9%, 0.9% over the upper limit of the price stability target range set by the government. This is the fourth consecutive year that Governor of the Bank of Israel Stanley Fischer has missed the inflation target, a target he has not in fact met since taking office six months in 2005.

The reason for the flat index is explained mainly by the decline, for the first time in 2009, in the housing item, which fell 0.8%. This item constitutes 21% of the total index.There were also falls in prices of cucumbers, by 25%, in fuel, by 0.5%, and in hotels and guest house charges, by 5%. The falls were offset by rises of 8.3% in prices of clothing, following the entry of winter items into stores, and of 6.7% in footwear prices. Electricity prices rose 2.1%.

The Bank of Israel argues that tax increases in the bi- annual budget and economic plan (VAT, cigarettes, alcohol, gasoline, etc.) caused a rise in the index of at least 1.2%. However, even if the tax effect on inflation in 2009 is discounted, it is still at the upper limit of the price stability target.

The December index means that the Bank of Israel will not be expected to raise interest rates at the end of the month, since it has already raised the interest rate to 1.25% with two successive hikes, and it seems that Fischer will wait this month, mainly because of the sharp appreciation of the shekel against the dollar, and given the assessment that the US Federal Reserve will not start to raise interest rates until the end of 2010.

Published by Globes [online], Israel business news - www.globes-online.com - on January 15, 2010

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