Indexation Gone Rampant

The Central Bureau of Statistics in Jerusalem announced last week what for Israelis is the most vital news of the month: the inflation rate. In June it slowed to 4.6%, or an annual cost of living increase of 76%, vs. last month's 133%.

As soon as the inflation figure was announced, Israelis pulled out pocket calculators and began computing the value of their bank accounts, and merchants began adjusting prices. Banks, retirement funds and other financial institutions are automatically required to adjust the value of savings accounts, pensions and life insurance policies to offset fully the losses caused by the cost of living increases. A person's bank balance, for example, is immediately raised in line with the previous month's inflation. Every three months, employers must add 80% of the last quarter's inflation to their workers' wages. Informally, rents and the price of a wide range of big-tag goods like autos, television sets and video recorders soon increase as well. All this is part of the world's most comprehensive system of indexation.

On the positive side, cost of living adjustments have enabled Israelis to withstand the onslaught of triple-digit inflation without succumbing to the moral decay, disillusion with democratic institutions and political polarization that are normally associated with a prolonged period of soaring prices. Israelis have continued to save at their commendably high rate (24% of net personal income last year, vs. less than 5% in the U.S.). Because of the continual upward adjustments, the retired and disabled on pensions have not been reduced to poverty. And, despite the business turmoil caused by galloping costs, the country's economy grew last year by a strong 5%.

On the negative side, however, indexation has proved to be an engine of more price rises. Israeli inflation has created a disoriented economy in which consumers become so buffeted by price increases that they no longer even remember what an item is really worth. The price of milk, for example, has climbed nearly 30% in just over a month to -L-.27 (53-c-) per liter. Five years ago, the same item cost -L-2.50. A large number of businesses are hurting so badly that they are cutting back on staff or closing down. A major cause: the annual interest rate on bank loans is 150%.

Indexation at home has led to a constant devaluation on the world money markets of Israeli currency, whose name was changed from the pound to the biblical shekel earlier this year. One digit was knocked off the currency so that -L-10 became one shekel. During the past six months the shekel has fallen from 3.4 to 4.7 to the dollar. Because of its huge domestic and foreign borrowings, the country already must spend a crippling 30% of its G.N.P. on repayment of loans and interest. As its currency loses value, the burden of its foreign debts will become heavier. But despite all this, Israel has no plans to ease the country off cost of living adjustments. In fact, the government is expected to pass new legislation this week that would index income taxes to inflation.

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