Israel's Inflation Rate Misrepresents True Cost of Living for Households

While official inflation in Israel stands at a low 1.5%, many households are experiencing a significantly higher increase in their expenses due to the rising cost of borrowing, according to a new study by the Taub Center for Social Policy Studies. The Consumer Price Index (CPI) measures the cost of a basket of goods and services, but it largely excludes the price of money, specifically interest rates on mortgages and consumer loans.

The study, conducted by Professors Benjamin Bental and Levav Shami, highlights that the CPI does not fully capture the financial burden on households with significant debt. For instance, the average interest rate on mortgages reportedly rose by 42% in 2022 and 52% in 2023. When the cost of financing a home is factored into a supplementary index, the increase was four to six times higher than the official CPI during those years.

The discrepancy arises because the CPI measures housing services based on a 'imputed rent' method, estimating what homeowners would pay if they were renting a similar property. This method omits the actual mortgage payments and interest expenses that homeowners incur. A family with substantial loans can see their monthly expenses increase by hundreds or even thousands of shekels due to rising interest rates, even if the prices of goods and services remain stable.

This issue extends beyond mortgages to other forms of consumer credit, such as car loans, renovation financing, and even overdrafts. Households that rely heavily on credit experience a greater impact from the 'price of money.' Conversely, households with savings and no debt may benefit from higher interest rates.

The research suggests that while the official CPI is a valid measure for its defined purpose, it fails to represent the lived financial reality for many Israelis, particularly those with mortgages. The Taub Center proposes presenting supplementary indices that include financing costs to provide a more comprehensive picture of household expenses and the true cost of living.