The Central Bureau of Statistics prices committee will tomorrow update the weighting of the components of the Consumer Price Index (CPI). Sources inform ''Globes'' that that the prices committee will increase the weight of the CPI's housing item (rent) to 25% from 21%. The prices committee revises the CPI every two years; the last update was in 2009.
The weight of the components of the CPI depends on their proportion of consumer spending. The sharp rise in home prices in the past two years has been accompanied by a rise in rent, and increased the weight of rent as a proportion of consumer spending. This requires a revision of the CPI. The increase of the housing item's weight by four percentage points is extraordinary, as the weight of the various items comprising the CPI are rarely changed.
The change in the CPI will affect inflation, because the capital market believes that home prices will continue to rise in 2011. This means that beginning with the CPI for January, which the Central Bureau of Statistics will publish on February 15, the CPI will be more greatly affected by rising rent than before.
The housing item rose 5% in 2010, accounting for 41% of inflation. Conventional wisdom believes that inflation will be high in 2011, driven by rising prices for commodities, including food and oil, which will force Governor of the Bank of Israel Prof. Stanley Fischer to raise the interest rate.
Published by Globes [online], Israel business news - www.globes-online.com - on February 6, 2011
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