Israel's monthly price data were reported today by the Central Bureau of Statistics. The June consumer price index, like that in the US, was flat. It had risen 0.2% in May. The year-on-year rate is a mere 0.3%. For wholesale prices, the index for June fell 0.4%, although prior increases have put the year-on-year rate at 5.1%.

It's interesting to see in the first graph that the consumer and wholesale indexes moved along pretty much the same trend until 2002. Since then, the consumer price index has been almost flat, while the wholesale index has continued along its former trend or even somewhat stronger. Wholesale prices are domestic prices, those charged by manufacturers selling their finished output "at the factory gate". Input costs are likely a major determinant, and over the last five years there has been some correlation with oil prices, 57%, as seen in the second graph. Notably, this relationship was not so clear in prior years, but perhaps the wide swings in the oil market since 2000 have had an impact on this smaller country.

But then how can consumer prices be so stable? A quick look at the value of the shekel will give a good clue. In the third graph, it is seen to run very close to the level of the CPI. The foreign exchange rate is no trivial matter for the final price level. For the economy as a whole, imports run right at 50% of GDP. With imports so important, prices of imported products matter a great deal to pricing, so the fact that the shekel has steadied and even improved against the US dollar since mid-2002 has probably helped greatly in flattening the Israeli CPI.