Inflation and the Consumer Price Index

On this page we'll explain inflation and the Consumer Price Index (CPI). For most of us it's a vague, not particularly interesting idea. But when it comes to a mortgage, it's a hugely important one. It affects your money, your monthly payments, your mortgage mixture, the Bank of Israel interest rate, and more.

So what exactly is inflation?

Remember how, back when we were kids, an ice cream at McDonald's cost one NIS and ninety agorot? By 2014 that same ice cream already cost four NIS and fifty agorot. And what about a movie ticket? Remember when it cost twenty-seven NIS? Today the price has already passed forty NIS. And one last example, if we may. In the early 2000s, when we wanted to rent an apartment in one of the nicer parts of Gush Dan, the rent was 4,000 NIS a month. Today, online listings show that the rent for a similar apartment in that neighborhood doesn't drop below 8,000 NIS.

If you have more examples like these, and it seems like prices just keep rising and rising — you're absolutely right. And if your salary hasn't kept pace, the upshot of all these price increases is that your money now buys less.

Factors that reduce inflation

What brings the inflation rate down: technological changes, increases in the supply of goods, and the removal of government regulation can affect inflation and push it downward.

• Parallel imports of car spare parts have lowered the cost of repairs at garages.
• Online shopping, through internet platforms (such as Zap, Amazon, and Terminal-X), opens up markets and products that weren't accessible to us before and lets us comparison-shop far more effectively — and that drives prices down.
• Digital insurance (car insurance, for example) — a model that can lower prices thanks to a cheaper operating setup.

Factors that raise inflation

What pushes the inflation rate up: the factors that raise inflation include rising commodity prices and weaker competition in the economy. An upgrade in the level of service and the products we get also raises prices and, with them, inflation.

• Supermarket chains use technology and Big Data to raise prices.
• Changes in fuel prices feed through to the prices of our flights.
• Part of the rise in cinema ticket prices comes from the higher level of service on offer — movie theaters today are built to a higher standard than they used to be (legroom, seat quality, sound systems, a lobby before you enter the auditorium, and so on).

Frequently asked questions about inflation

Who measures inflation?

The Central Bureau of Statistics (CBS) is responsible for measuring changes in the Consumer Price Index. The change in the Consumer Price Index is, in practice, the inflation rate.

The CBS is the country's official body for collecting and processing data. Surprisingly, if you're selected to take part in a CBS survey, you're legally required to respond, under the Statistics Ordinance of 1972.

How is inflation measured?

The CBS puts together a basket of goods that the average Israeli family consumes. The assumption, for instance, is that an average Israeli family takes a family holiday, eats fruit and vegetables, and uses electricity and water. Reasonable enough, right?

By running surveys on a sample population, the CBS works out how much that basket of goods costs this month. The ratio between this month's cost and last month's is the monthly inflation rate.

Can I get an example of how inflation is measured?

Why is inflation a bad thing?

High inflation is bad. When it's high, the money you earn simply doesn't stretch far enough to maintain the lifestyle you want.

Who is responsible for planning and controlling inflation?

The Bank of Israel is responsible for price stability — that is, keeping inflation in check. Its goal is to hold the annual inflation rate between 1% and 3%.

The Bank of Israel interest rate is the bank's main tool for managing inflation. When the Bank of Israel raises the interest rate, it makes borrowing more expensive throughout the entire economy. When the price of money rises, the disposable income in our pockets that goes toward consumption shrinks. In other words, we have less money for restaurants, flights, replacing the car or the furniture at home, and so on. Falling demand for goods, while their supply keeps flowing, drives prices down.

What has the inflation rate been in recent years?

You can see here inflation in Israel.

How can the inflation rate be influenced?

• To raise inflation: the Bank of Israel can adopt an "expansionary monetary policy" — that is, push more money into the economy to stimulate activity and, as a result, raise inflation.
• To curb inflation: the Bank of Israel can raise the Bank of Israel interest rate, which makes the loans taken out by households and companies in Israel more expensive. That reduces spending power and cools the market.

If inflation is a bad thing, why not act to keep it at 0%?

Zero inflation, or even negative inflation, is also a bad thing. Suppose the Consumer Price Index consists only of family holidays. If inflation is negative, it means a family holiday is cheaper this month than it was last month. And if that holds true in the coming months too, there's no reason to buy the holiday now — better to wait, since the price will only keep dropping. So why is that bad for the economy? Because the economy runs on the consumption of goods and services.

How is inflation connected to my mortgage?

You can take out loans on tracks that are linked to the Consumer Price Index. These tracks are:

• Fixed interest rate linked to the CPI (Katz)
• Variable interest rate linked to the CPI (Matz)
• Government-subsidized mortgage (linked to the CPI)

These loans carry a lower interest rate than their non-linked counterparts, but they come with a catch — your debt to the bank is CPI-linked. And every time the index rises, so does the debt to the bank. Inflation increases the monthly payment.

Good luck!