Israel's Consumer Price Index Explained: Calculation, Impact, and Why Inflation Feels Higher

Israel's Consumer Price Index (CPI) measures the monthly change in the cost of a fixed basket of goods and services representing an average household's consumption. Calculated and published by the Central Bureau of Statistics (CBS) around the 15th of each month, the CPI is the primary tool for tracking inflation in Israel. The basket includes categories such as food, housing, transportation, clothing, health, education, and entertainment, each weighted according to household expenditure surveys. Housing, particularly rental costs, carries a significant weight in the index.

The CPI reflects the average price change across these categories but does not represent the inflation experienced by any specific household, as consumption patterns vary widely. It also excludes home purchase prices, focusing mainly on rent. The CBS collects prices monthly for about 1,300 representative products and services from physical stores, online platforms, and administrative data to ensure consistent comparisons over time.

The index influences key economic mechanisms: it guides the Bank of Israel's interest rate decisions aimed at maintaining inflation within a 1%-3% target range, affects repayments on mortgages linked to the CPI, and adjusts contracts and payments such as rent agreements, child support, government benefits, and government bonds indexed to inflation.

The CPI is a weighted average where each category's price change is multiplied by its weight in the basket. For example, a 2% rise in rent (with a 30% weight) impacts the index more than a 10% increase in a minor category. This weighted approach means some price increases affect the CPI more than others.

Many Israelis feel inflation is higher than the official CPI indicates because their personal spending patterns differ from the average basket. Households spending more on rapidly rising items like food, rent, or education experience higher "personal inflation." Additionally, psychological factors cause people to notice frequent price hikes on everyday items more than price drops on less commonly purchased goods. Thus, the official CPI and individual experiences of cost of living can diverge significantly.