New study: Price setting behavior in Israel—an empirical analysis

·         Research conducted using a comprehensive database used to calculate the Consumer Price Index indicates that the mean duration between price changes of various goods and services in Israel is about 6 to 9 months.
·         Price reductions make up about a third of price changes, and their average size, about 10 percent, is similar to that of price increases. Overall, the average size of price changes is 3.5 percent.
·         Changes in the VAT rate only affect the size of price changes of products with frequent price changes.
·         The duration between price changes of food products in supermarket chains is about half that of independent grocers—5 months vs. 10 months.
Joint research conducted by Doron Sayag at the Central Bureau of Statistics and Sigal Ribon at the Bank of Israel indicates that prices of goods and services included in the CPI in Israel change every 6–9 months, on average.
The research examined the price behavior of CPI component items via a dataset—consisting of more than 3 million observations—which is used by the Central Bureau of Statistics for its calculation of the CPI. The use of these data allowed the examination, on a detailed basis, of the amount of time between price revisions, the size of the price changes for various goods and services, and the factors impacting on them. It was found that there is a considerable difference between price behavior of various goods and services. While the mean duration between price changes of services, such as health and education, is about 16 months, prices of other products change about every 8 months, in particular energy product prices, which change about every 3 months.
The average price change was about 3.5 percent. However, this reflects an average change of about 10 percent in price increases, which make up about two-thirds of price changes, and an average reduction of 10 percent when prices decrease.
It was also found that the price of about one-fifth of products, on average, change each month. This proportion is slightly less when inflation is lower, and is slightly larger when there is a change in the VAT rate.
Although VAT rate changes shorten the mean duration between price changes, the effect on the size of the price change is only found in products for which the price changes frequently.
It was found that the inflation environment impacts on price behavior. Lower inflation lengthens the duration and increases the size of updates to small prices; greater variance in inflation over time shortens the period of time between price updates.
Another interesting finding is that the mean duration between price updates of food products at supermarket chains is about 5 months, while at smaller grocers it is about 10 months.