The Consumer Price Index, known in Hebrew as “Madad” (מדד), is one of the most important economic indicators in Israel. Whether you’re renting an apartment, taking out a mortgage, or simply trying to understand your cost of living, the Madad affects many aspects of daily financial life in Israel. This comprehensive guide explains what the Madad is, how it works, and why it matters to residents and investors alike.
What is the Madad?
The Consumer Price Index (Madad) is an economic measurement that tracks changes in the price level of a weighted average market basket of consumer goods and services purchased by households. In simpler terms, it measures the average change over time in the prices paid by consumers for a representative selection of goods and services.
The Madad serves as Israel’s official measure of inflation and is calculated and published monthly by the Central Bureau of Statistics (הלשכה המרכזית לסטטיסטיקה).
How the Madad Works
Calculation Method
The Madad tracks price changes in about 1,000 goods and services, grouped into the following major categories:
- Housing (25%)
- Food (16%)
- Transportation and communication (20%)
- Education, culture, and entertainment (12%)
- Health (6%)
- Furniture and household equipment (4%)
- Clothing and footwear (3%)
- Miscellaneous goods and services (14%)
Each category is weighted according to its proportion in an average household’s budget, with housing representing the largest component. The weights are updated periodically based on household expenditure surveys.
Publishing Schedule
The Madad is published monthly, typically around the 15th of the following month. For example, the Madad for March would be published around April 15th.
Why the Madad Matters in Daily Life
Rental Contracts
Most residential rental contracts in Israel are linked to the Madad. This means that rent typically increases annually according to the rise in the CPI over the previous year. For example, if your monthly rent is ₪5,000 and the Madad increases by 2% during the year, your landlord can legally raise the rent to ₪5,100.
Mortgage Payments
Most mortgages in Israel are partially or fully linked to the Madad. When taking out a mortgage, you may choose between:
- Madad-linked mortgage: The principal is adjusted according to inflation, offering lower initial interest rates but with the risk of increasing if inflation rises.
- Unlinked mortgage: The principal remains constant regardless of inflation, typically with higher interest rates.
Salaries and Wages
Many employment contracts, especially in the public sector and under collective agreements, include automatic cost-of-living adjustments based on the Madad. This helps ensure that real wages don’t erode over time due to inflation.
Savings and Investments
Various financial products in Israel are linked to the Madad:
- Savings plans (תוכניות חיסכון): Many offer returns that are partly based on changes in the Madad
- Government bonds: Some bonds, like the Series E bonds (אג”ח מסוג סדרה ה׳), are indexed to the Madad
- Pension funds: Often have components that are Madad-linked to protect retirees from inflation
Historical Context and Trends
Israel’s Inflation History
Israel has experienced significant inflation episodes in its history:
- 1980s Hyperinflation: Peaked at nearly 450% in 1984, leading to the Economic Stabilization Plan
- 1990s-2000s: Gradual stabilization of inflation rates
- Recent Years: The Bank of Israel targets an annual inflation rate of 1-3%
Recent Trends
In recent years, Israel’s inflation rate has generally remained within the Bank of Israel’s target range, though with occasional fluctuations due to global economic conditions, housing market developments, and other factors.
How to Stay Informed
To track the Madad and understand how it might affect your finances:
- Official Sources: The Central Bureau of Statistics website (www.cbs.gov.il) publishes monthly updates
- Bank of Israel: Provides analysis and inflation forecasts (www.boi.org.il)
- Financial News: Major Israeli financial publications like Globes and TheMarker regularly report on and analyze Madad changes
- Personal Finance Apps: Many Israeli banking apps now include Madad calculators and tracking features
Practical Tips for Dealing with the Madad
For Renters
- When negotiating rental contracts, consider requesting a cap on Madad increases
- Be aware that landlords can only raise rent based on the published Madad according to your contract terms
- Budget for potential rent increases based on inflation forecasts
For Mortgage Holders
- Consider a mixed mortgage portfolio with both linked and unlinked components to hedge against inflation uncertainty
- Understand how different inflation scenarios might affect your long-term payment obligations
- Consult with a mortgage advisor about restructuring options if inflation rises significantly
For Investors
- During periods of rising inflation, consider Madad-linked investment vehicles
- Diversify between nominal and inflation-linked assets based on your inflation expectations
- Real estate often serves as a partial hedge against inflation in the Israeli market
Conclusion
Understanding the Madad is essential for managing your finances effectively in Israel. Whether you’re planning your monthly budget, negotiating a rental agreement, choosing a mortgage, or making investment decisions, the Consumer Price Index will play a role in your financial outcomes.
By staying informed about inflation trends and understanding how the Madad affects different aspects of your financial life, you can make more educated decisions and better protect yourself against the effects of inflation in Israel’s dynamic economy.
