Why Israel is not afraid of deflation?

Israel do not care about CPI growth and the inflation rate is negative for 24 consecutive months. Despite that the deflation worries the central banks around the world and financial institutions want to extend their strategies for monetary policy aiming at consumer price growth, CPI growth is clearly not a problem for Israel. This is because unlike Japan or Europe, the decline does not reflect so much on demand and consumption.

Since the demonstrators took to the streets in Tel Aviv five years ago, the government in the state is oriented towards reducing prices in areas where they are too high. During the last years, the government reduced the prices in many sectors, such as transport, energy, fresh water and etc. Other industries, such as air travel or procurement of food, which were previously isolated from the world market, became open to new competitors to help the decline in prices.

The measure has had a huge influence on consumers. The citizens suddenly began to have a wider range of options, which already were cheaper. Thus, although technically the economy is directed towards deflation with prolonged declines in prices, their growth would not have been so adverse and detrimental.

In the last quarter the increased consumption helped the economy in the country rose 4.3% yoy, but the main concern remains the country to defend its currency.

Israel has a technologically advanced market economy. The main export sectors are diamonds, high-technology equipment and pharmaceuticals, while the major imports include crude oil, grains, raw materials and military equipment. This is the only Middle East country without oil reserves.

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