According to figures released by the Central Bureau of
Statistics on Monday (July 15) the Consumer Price Index shot
up 1.3 percent in June, far exceeding even the most
pessimistic forecasts. The CPI has risen 6.3 percent in the
last six months. This compares with a rise of 6.6 percent for
the entire secular year 2001.
According to the Central Bureau of Statistics, which computes
the index, annual inflation is now running at a pace of about
9 percent, which is more than triple the government's target
of 2-3 percent. Furthermore, bureau economists said, July's
inflation rate was also almost certain to be high, thanks
largely to a series of government-approved price hikes in
monopolistic industries such as electricity and water.
Therefore, barring a series of unexpected price declines in
the second half of the month, they said, the July CPI would
rise by at least 0.7 percent -- even though the Wholesale
Price Index, which is normally considered a good predictor of
future inflation, rose by only 0.5 percent last month.
The high June CPI also creates a big question mark with
respect to interest rates. Most economists had predicted that
if the CPI rose by less than one percent, Bank of Israel
Governor David Klein would leave rates unchanged this month,
after having hiked the central bank's key rate by 4.5 percent
in June. But with inflation so unexpectedly high, Klein may
now decide on an additional rate hike.
On the other hand, the Shekel has strengthened considerably
over the past several days, closing on Monday at about NIS
4.67 to the dollar. This will certainly moderate inflation in
the months ahead, and it also provides an indication that the
markets are beginning to take the government's moves to
control the Israeli economy seriously. At its peak three
weeks ago, the exchange rate stood at NIS 4.982 to the
dollar; since then, the American currency has fallen by more
than six percent.
Observers say that in addition to the interest rate hike,
several other factors have contributed to the shekel's gains:
the dollar's worldwide weakness, the relative calm on the
security front recently, the Knesset's approval of a budget
cut for this year, the government's announcement of a further
steep budget cut in 2003, and the efforts to rein in
expensive private legislation, which finally bore fruit with
the Knesset's approval Monday night of a law to restrict such
bills.
June's inflation stemmed from rises in just about every
component of the CPI, with sharp increases in food (1.4
percent), housing (2.0 percent), shoes and clothing (4.7
percent) and transportation and communication (1.5 percent).
These rises were slightly offset by a 4.7 percent seasonal
decline in produce prices.
Much of the past half year's inflation can be attributed to
the 15.5 percent depreciation of the shekel during this
period. The exchange rate influences such key items as
housing prices (which are set in dollars for both sales and
rentals), electricity (since most fuel is imported) and
transportation (both gasoline prices and the purchase price
of cars, which are also all imported. Now that the shekel has
declined, there should be some relief in these areas in the
months ahead.
Finance Minister Silvan Shalom therefore predicted that
inflation would fall markedly in future months. The June CPI,
he said, was still heavily influenced by the dollar's climb,
but it ought to be the last month so affected.
MK Amir Peretz, chairman of the Histadrut labor federation,
promptly announced that workers would demand a cost-of-living
increase to compensate them for the steep inflation to date.
Peretz said the Histadrut leadership would hold an emergency
meeting to consider declaring a work dispute over the
issue.
Though the shekel's recovery has not yet had an impact on
inflation, it has helped stabilize the capital markets: The
share market has risen eight percent since its low of three
weeks ago, while shekel-denominated bonds have gained around
15 percent.
