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. It compares the current month's basket cost to the previous month, with the annual change defining the yearly inflation rate.

The CPI basket includes categories such as food, housing, transportation, clothing, health, education, and entertainment, each assigned a weight based on household expenditure surveys. Housing, particularly rent, holds a significant weight, making it a major factor in the index. However, the CPI does not reflect the cost of purchasing homes and does not represent any specific household's expenses, as consumption patterns vary widely.

Prices for about 1,300 representative products and services are collected monthly from physical stores, online platforms, and administrative data. The CBS tracks the same items over time to ensure accurate measurement of price changes rather than shifts in consumer behavior. The CPI is a weighted average of price changes across categories, meaning price increases in heavily weighted sectors like housing affect the index more than sharp rises in less significant categories.

The CPI influences key economic mechanisms: it guides the Bank of Israel's interest rate decisions aimed at maintaining inflation within a 1%-3% target, affects repayments on inflation-linked mortgages, and adjusts contracts such as rent agreements, child support payments, government benefits, and government bonds. A rising CPI directly increases these costs even without new agreements.

Many Israelis feel inflation is higher than the CPI indicates because the index averages all households. Families spending more on rapidly rising categories like food, rent, or education experience higher personal inflation. Additionally, people tend to notice frequent price increases more than occasional price drops, contributing to a perception of greater inflation. Thus, the official CPI and individual experiences can both be accurate but measure different realities.