Consumer Price Index Misrepresents Cost of Living, Study Finds

A new study by Professors Benjamin Bental and Laviv Shami from the Taub Center argues that Israel's Consumer Price Index (CPI) does not accurately reflect the real cost of living experienced by households. The researchers highlight that the exclusion of the cost of money, specifically interest paid on mortgages and consumer credit, leads to an underestimation of the financial burden on Israeli families.

The CPI, like in most countries, measures the prices of a basket of consumer goods and services. The housing component, which constitutes 18% of the index, uses a "imputed rent" method. This method estimates the rent homeowners would pay if they rented their properties, thereby ignoring actual housing prices and financing costs that directly impact mortgage payments and household expenses.

The study developed a supplementary index that calculates the housing component based on actual housing financing costs. This alternative index shows a much stronger reaction to changes in financing conditions, particularly during 2022-2023 when the Bank of Israel significantly raised interest rates. The researchers found that the surge in mortgage interest rates was a primary driver of actual housing cost increases.

While the study does not dispute the CPI's validity for measuring inflation or suggest its replacement, it emphasizes that omitting the cost of money creates a significant gap in understanding household financial strain. The researchers recommend publishing supplementary indices alongside the official CPI that incorporate financing costs to provide a more realistic and comprehensive picture of the economic pressure on households.