The Consumer Price Index in Israel for the month of October will be published on Tuesday and according to estimates it is expected to reflect a horizontal increase in prices in many areas. The market is currently predicting a monthly increase of 0.5%-0.6% in the index, so that the annual inflation rate will reach at least 5%. The sections that are expected to reflect price increases are, among others, food, fruits and vegetables, rents, clothing, housing, apartment maintenance and flights abroad.
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In the food sector, a relatively significant jump is expected, also due to seasonal reasons, but not only. This is the period “after the holidays” when the periodic promotions disappear. To this should be added the wave of price increases in retail chains, as a result of the demands of manufacturers and suppliers. The fruit and vegetable section is also expected to reflect a jump as a result of seasonal changes.
What is the consumer price index and why is it important?
The Consumer Price Index is the state’s official tool for checking price changes in the economy. The index defines inflation – how much more expensive or cheaper it is to live here, compared to previous months. The index is published by the Central Bureau of Statistics (CBS) every 15th of the month at 18:30 (in 30% of cases the date will fall on a Friday or Saturday, then the index will be published on Friday at 14:00), and it shows the inflation rate of the previous month .
A long list of products, contracts, salaries and services linked to the index, with the aim of maintaining the value of money. In the real estate sector, for example, the exemption ceiling for renting an apartment and the purchase tax rates are updated every year in accordance with the index. A large part of mortgages are linked to the index (30% of the loans taken out last October) and quite a few additional loans are affected by it. Thus, when a price increase leads to an increase in the index, it is rolled into products many and actually fuels more price increases.
The index is also important for the Bank of Israel, when it comes to determining the level of interest that affects the entire economy. When inflation exceeds the target set for the central bank (1%-3% annually), the bank may respond by raising interest rates, with the aim of “cooling” the market and reducing demand.
What does the index consist of and how is the composition determined?
The CBS has broken down the basket of products and services that households consume each month into 1,400 items that belong to ten main categories including: housing, food, furniture, clothing and footwear, and education. Each product or service has a different weight in the index, which expresses the average monthly expenditure per family. The largest, for example, is rent (housing services, 25% of the average expenditure).
The basket is determined by a survey of household expenses conducted by the Central Bureau of Statistics. Since the consumption habits of households change, the weights of the items are updated every two years. Also find expenses for electric bikes or gluten-free products. The current basket was updated in January 2021, and the next update will be made this January, based on the 2021-2022 spending survey.
Why does it seem to many that the index does not reflect the price increases?
The index tries to create an average basket for the average Israeli, which of course does not necessarily meet a real Israeli. The CBS explains that the index consists of many products and services, and our tendency is to remember only changes in the products we purchase on a daily basis. According to them, “the CBS is working to calculate the index using scientific methods accepted in the world, while consulting with the committee of experts on behalf of the Public Council for Statistics and with international bodies The trustees are responsible for producing official statistics.” And yet, only recently, for example, the chairman of the Securities Authority, Anat Guetta, said at the Globes Israel Business Conference, that “if the price index really reflected the cost of living, we would see much higher inflation rates.”
What raises or lowers prices?
The product basket consists of the prices of food, furniture, clothing and footwear, etc., which are also affected by import costs and exchange rates or by volatility resulting from seasonal changes. For example, when there is a shortage of vegetables as a result of changing seasons or extreme weather, their price increases. The price of fuel, for example, is affected by the world price and currency fluctuations. Therefore, product prices are greatly affected by external factors and may change with high frequency accordingly.
On the other hand, when you look at the services side, the story is different. This is especially true in the housing section, which makes up a quarter of the index and consists mainly of the rent component. These services are things we produce, and are not necessarily related to seasonal or overseas fluctuations. Inflation in the prices of services is often more consistent and teaches about “sticky inflation” – one that is more difficult to fight and feeds on itself. When you see that the inflation in Israel is low compared to the rest of the world in the last year, it is mainly thanks to the prices of the products that have become more expensive at a slower rate.
The big elephant in the room: the difference between inflation and the housing price index
The apartment prices that have soared in recent years, and even more so this year, have not been included in the price index since 1999. The CBS publishes the housing price index at the same time as the consumer price index every 15th of the month. The reason for this is that the price index checks the change in the cost of living, and if the value of my apartment has increased or This decrease does not affect my monthly expenses. Furthermore, buying an apartment also has an investment component, so it is better to examine the change in rental prices – which reflect a consumer product.
While the consumer price index reflects what was done in the previous month, the housing price index is calculated two months late. The index expresses a two-month change in apartment prices, 45 days after the end of the reference month. For example, the index published in October is based on transactions carried out in July-August. The calculation is based on data from the Tax Authority and includes residential real estate transactions of new and second-hand apartments throughout the country, after it corrects them for biases, using a complex formula. This, in a market where no 2 apartments are ever the same.
Buying a new apartment? Get to know the construction input index
At the same time as the apartment price index, the CBS publishes another index that dramatically affects the prices of new apartments – the construction input index. This is an index that measures the change in the costs of a fixed “basket” of construction materials, products and services used to build apartments (a parallel index checks the construction inputs for commerce and offices , which include, for example, more aluminum products, etc.) Since the purchase of a new apartment is a process that may take even three years or more, the buyers’ debt is pegged to the construction input index or the consumer price index, and the price they pay will probably be different from the one signed in the sales contract with the developer. In July 2022, an amendment goes into effect to the Sales Law which stated that entrepreneurs could attach only 40% of the price of a new apartment to the construction input index.