The consumer price index for December 2020 decreased by 0.1% – and in all of 2020 decreased by 0.7%
The consumer price index for December 2020 decreased by 0.1% to a level of 100.1 points. In 2020, the index fell by 0.7%. The energy-free index has fallen 0.2% in the past year.
The housing item was affected in the past year by closures and it recorded a decrease of 0.2%. The last time there was an annual decline in the housing item was in 2006. The only item that became more expensive in the past year was vegetables and fruits.
Dwelling prices, which are not weighted in the consumer price index, rose in the latest survey by 1.0% (temporary data). In the past year, apartment prices have risen by 3.2%.
Consumer Price Index Forecast
The closures affect inflation in the short term, and in December this is reflected in the housing section. Even at the beginning of the crisis, we estimated that this section would be affected by the restrictions on activity more than the other sections. Assuming that we see the economy exceeding the restrictions in the second half of the year, we may also see rental prices rise again, partly against the background of a continued rise in apartment prices. The housing market also illustrates well the phenomenon of inflation in property prices, which is not reflected in the consumer price indices – housing prices rose by 3.2%, and the housing index fell by 0.2%. Another factor that will affect inflation in the coming year is the exchange rate. The change in the Bank of Israel’s policy, according to which it will purchase $ 30 billion this year, leads us to assume that in the coming months we will see a certain weakening of the shekel exchange rate.
The inflation forecast for the 12 months is on 0.7%, A rate that is still lower than the lower limit of the inflation target, against the background of continued restrictions on economic activity in the first half of the year. We appreciate that There is a chance for a significant increase in the inflation environment in the second half of 2021.
Impact on monetary policy
The Bank of Israel announced last week a $ 30 billion acquisition plan in 2021, in light of the sharp appreciation in recent weeks. In 2020, the Bank of Israel purchased about $ 21 billion, without any prior commitment. In light of the Bank of Israel’s commitment to purchase such a high amount, we estimate that the shekel may weaken in the coming weeks. In principle, the Bank of Israel has an exit from the commitment in a situation in which “foreign exchange purchases lead to a devaluation of a magnitude that is inconsistent with the achievement of the Bank’s targets in the area of price stability and financial stability.” This exit is narrow. “Consistency with financial stability” is already a definable definition, and it is possible that if inflation expectations rise above 2%, for example, it will be interpreted as a reason to reduce purchases. But the Bank of Israel will probably “try” to complete foreign exchange purchases. So that his future statements will have the same level of credibility.
The combination of foreign exchange purchases and government bonds increases the central bank’s balance sheet at a very rapid pace, which means that this is a very broad policy even in relation to the largest central banks in the world.