12-month inflation expectations have fallen to 2.5% in August 2011 from 3% in January, the Bank of Israel announced today.
The drop in inflation expectations is a strong sign that the market is pricing in the very high risk of a sharp economic slowdown in Israel, including a slump in demand that will drive down prices. The average 12-month inflation expectations of commercial banks and economic consultancy firms has fallen to 2.5% from 2.9%, indicating that they, too, expect a slowdown.
12-month inflation expectations have fallen within the government's price stability target of 1-3%, after over a year. Although the drop in inflation is good news in terms of some easing in the cost of living, one of the main reasons for the social protests of recent months, but it also means slower economic growth and subsequent rise in unemployment.
The Bank of Israel defines inflation expectations as the rate of inflation that would make the yields on indexed and unindexed government bonds equal (break-even inflation); they include an inflation-risk premium.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2011
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