Buy-It In Israel

Understanding the Madad – Consumer Price Index

Posted on 14. Jul, 2010 by Buy-It In Israel Staff in Miscellaneous

©iStockphoto.com/Mark Swallow

The Madad, which is the Hebrew for Consumer Price Index (CPI) or rate of inflation, is followed very closely by Israelis since movements in the monthly index affect nearly every aspect in life from property in Israel, salaries, mortgages, transportation costs or prices of fruit and vegetables, and other expenses. In brief, a number of very important income and other expense items of every household are linked fully or partially to monthly or quarterly inflation.

The Israeli CPI shows the change in prices of a standard package of goods and services which Israeli households purchase for consumption. The index is published on a monthly basis by Israel’s Central Bureau of Statistics on the 15th of each month. A major component of the CPI is the Israel real estate market, which is heavily affected by the shekel-dollar exchange rate because of the trend in Israel of linking prices to the US dollar. The CPI includes a housing index and sub-indexes such as tenant-owned housing services and rent.

In the case that contracts signed for the purchase of new homes in Israel before end of construction, each installment for payment is linked in Israel either to the CPI, the Building Index (if property is bought through construction companies), or the shekel-dollar exchange rate fixed on the day of the signing of the contract.

For example, the outstanding amount owed on the purchase price of an apartment through a mortgage in Israel will go up if the CPI or the Building Index goes up. However, if the index goes down, the purchase price of the property will not automatically come down since a base threshold index rate is fixed in the contract. Therefore it is advisable depending on the economic climate to consider the possibility of an acceleration of the schedule in payments, which could save a lot of money.

The Building Index is published by Israel’s Housing and Construction Ministry and Central Bureau of Statistics and is indexed in a similar way to the CPI, to which the majority of mortgages are linked in Israel. From the beginning of this year, the CPI changed by an aggregate 0.4 percent, while the Building Index changed by an aggregate 2.6 percent during the same period.

Furthermore there is a direct correlation between the CPI or inflation and interest rates. When inflation goes up, the Bank of Israel could be expected to raise interest rates to suppress inflation.

In a historical perspective, Israel went through a hyperinflation period in the 1970s and 1980s, when levels increased steadily from 13 percent in 1971 to 111 percent in 1979, jumping to 191 percent in 1983 before reaching a peak of 445% in 1984. To bring inflation back to normal levels, the government put a total freeze on the price of all goods and services. As a result of this measure, inflation dropped to 185 percent in 1985. A year after the freeze was lifted gradually inflation fell to 19 percent. In the 1990s, inflation levels stabilized further and declined to 1.3 percent in 1999.

Since inflation levels have become more moderate in the past ten years and are more similar to those common in Europe and America, the CPI is a less critical part of daily life in Israel than in the past. The process though towards a stable inflation rate took nearly 15 years.

In the first six months of this year, the rate of inflation has been declining as Israel real estate price inflation, in particular, has eased. As a result inflation expectations for the next 12 months have declined to an estimate of 2.7 percent, down from 3.4 percent last August. In addition, housing inflation has come under control: the housing sub-index within the CPI, which peaked at 17 percent year-on-year last June, has fallen to 4.7 percent in April.

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