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22 Teves 5761 - January 17, 2001 | Mordecai Plaut, director Published Weekly
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NEWS
Economy: Zero Inflation in 2000; The Operation was successful--But the Patient Died?
by A. Halevy

This includes last minute topical news of economic interest.

The Central Bureau of Statistics said this week that inflation in 2000 totaled zero. There was absolutely no inflation. The Consumer Price Index (CPI) fell 0.1 percent in December. Gross domestic product (GDP) increased by an impressive 5.9 percent last year.

Low CPI figures are also expected in the coming months; the CPI may even fall. Assessments are that Governor of the Bank of Israel David Klein is likely to lower the interest rate this month by 0.2-0.3 percent, from its current level of 8 percent.

The Central Bureau of Statistics (CBS) attributed December's results to a 3.7 percent decrease in fruit and vegetable prices and a 3.5 percent drop in fuel prices.

During the year there were increases in energy prices and the cost of processed foods and health care. However, an appreciated shekel, coupled with the Finance Ministry's August removal of sales taxes on over 600 household goods and appliances, lowered price levels. Consumer demand also waned during the more than three months of Palestinian violence.

According to the CBS, housing costs dropped 2.4 percent, and fruit and vegetable prices, a key indicator, dropped 5.9 percent during the year. Furniture and office equipment prices fell by 5.3 percent.

Inflation for 2000 is not the lowest in Israel's history. Inflation hit a low in 1950, two years after the establishment of the state, when the CPI fell 6.6 percent, year to year. In 1966, in the middle of a deep recession, prices rose only 0.2 percent. The highest rate of inflation, 444.9 percent, was posted in 1984. In 1979-1985, inflation was a cumulative 1,298 percent.

In accordance with the government inflation targets, inflation fell to single figures in 1995-2000. The economy was practically inflation-free in 1999-2000.

The Bank of Israel says an inquiry has to be conducted to determine why inflation is so low, but that during the next fiscal year it will be sure to bring up the inflation rate.

Who would have thought the Bank of Israel would be compelled to apologize for bringing the inflation rate down too far?

In recent years the central bank has introduced a policy of restraint based on maintaining a high credit rate to prevent rampant inflation, but apparently too strong a dosage was prescribed. The operation was a success--but the patient died.

In an interview with Ha'aretz, bank director Dr. David Klein said that an internal investigation would be made to determine just what happened. Over the last two years the Bank of Israel has missed the economy's target rate of inflation by a lot. The target rate of inflation for the 1999 fiscal year was 4 percent, while the actual rate of inflation was 1.3 percent. The target rate for 2000 was between three and four percent, while the actual rate of inflation was zero percent. Says Klein, "This will definitely receive our attention. Missing the mark by such a wide margin demands that we conduct an internal investigation. The moment we obtain the results, we will notify the public. For now, our goal for 2001 is to meet the target rate of inflation set by the government--2.5 percent- 3.5 percent. The Bank of Israel is required to meet the target rates set by the government, and the inflation rate achieved for the year 2000 did not match the target rate. The question is what caused this to occur. We have a number of possible explanations that we are looking into."

The Bank of Israel director admits the bank's policy of restraint exceeded expectations and now the painful success has to be rectified. "The goal of our policy was not to bring about one of the lowest rates of inflation in the world." In closing, he made a statement that no normal economist would have ever dreamed of hearing from the mouth of the director of the Bank of Israel: "The inflation rate for the year 2001 will have to be higher than the rate for the year 2000!"

 

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