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seeking fi nancing to invest and expand were in no position to match the government's gener-
ous terms.
After fi fteen years of single-digit price rises, Israel's CPI climbed by a rate of 13 to 14 percent
annually in 1971-1972. It reached 80 percent a year at the end of the decade and moved into
the triple digits during the early 1980s. Although infl ation has many causes that economists did
not fully understand, undoubtedly excessive budget defi cits fi nanced by the Bank of Israel's
printing money contributed to infl ation. Indexation exacerbated the problem by automatically
passing along price rises as a kind of infl ationary aftershock.
Infl ation undermined economic growth because it made planning for business more dif-
fi cult, thereby discouraging investment. Indeed, even as prices rose, Israel's economic growth
slowed in a phenomenon known as stagfl ation. While much of the world suffered stagfl ation
in the 1970s, Israel felt its effects longer and more deeply than most others. Moreover, once in-
fl ation reached a rate of 10 to 20 percent per month, indexation could no longer shield people
from the effects of price hikes.
Infl ation in the 1970s and 1980s eroded so much of the Israeli currency's value, as well as the
public's confi dence in it, that it had to be replaced twice in the space of fi ve years. In 1980, the
lira (plural, lirot), the Israeli pound, in use since 1948, was succeeded by the shekel at a rate of
ten lirot for every shekel. In 1985, the government replaced the infl ation-battered old shekel
with a new shekel, this time at a rate of 1,000 old shekels for each new one. The new shekel re-
mains in use today. The 1985 Economic Stabilization Plan fi nally returned the infl ation rate in
the second half of the 1980s to the lower double digits. Since 1999, the CPI has remained under
5 percent each year, in line with the CPI in other developed economies; the low CPI has been
a factor in the economic growth since the 1990s.
Infl ation began to accelerate in the 1970s and was not brought down until after the 1985 Economic Stabi-
lization Plan. It took another fi fteen years to achieve consistent single-digit CPIs. (Data: Israel Central Bureau
of Statistics; Chart: David Rosenberg. Drawing by Bill Nelson.)
