The Expected Rate of Inflation Derived from Various Sources

Date	Calculated from capital market1	Average of the inflation forecasts for the 12 months ahead4	One-year inflation expectations derived from internal interest rates5	One-year expectations derived from inflation contracts7
For the first year	For the second year (forward)	For the third year (forward)	For years 3-5 (forward)2	For five years	For years 5-10 (forward)3
Annual data:
2016	0.2	0.8	1.1	1.4	1.0	2.2	0.6	0.1	0.1
2017	0.2	0.7	1.1	1.5	1.0	2.1	0.6	0.3	0.3
2018	1.0	1.2	1.5	1.6	1.4	1.9	1.0	0.7	0.9
2019	1.1	1.4	1.5	1.6	1.5	1.7	1.2	0.9	1.1
2020	0.0	0.9	1.3	1.4	1.0	1.6	0.5	0.2	0.2
Monthly data:
2020
January	1.0	1.3	1.4	1.5	1.4	1.6	1.1	0.7	0.8
February	1.0	1.3	1.3	1.5	1.3	1.5	1.0	0.7	0.8
March	-1.1	0.6	0.9	1.2	0.6	1.6	0.8	0.2	0.4
April	-0.8	0.9	1.3	1.5	0.9	1.6	0.2	0.1-	0.3-
May	-0.2	0.9	1.4	1.5	1.0	1.5	0.2	0.1-	0.3-
June	0.4	0.8	1.3	1.5	1.1	1.7	0.5	0.3	0.4
July	0.0	0.5	0.9	1.3	0.8	1.7	0.4	0.1	0.1
August	0.0	0.8	1.2	1.4	1.0	1.7	0.4	0.1	0.1
September	0.1-	0.8	1.3	1.4	1.0	1.8	0.4	0.2	0.0
October	0.4-	0.8	1.3	1.4	0.9	1.7	0.4	0.1	0.2-
November	0.1-	1.0	1.4	1.4	1.0	1.7	0.4	0.1	0.0
December	0.3	1.2	1.5	1.5	1.2	1.7	0.4	0.2	0.2
2020
January	0.9	1.2	1.6	1.7	1.4	1.8	0.6	0.4	0.6
February	1.2	1.5	1.6	1.6	1.5	1.8	0.7	0.6	0.9
March	1.4	1.6	1.7	1.7	1.6	1.8	0.9	0.9	1.3
April	1.5	1.6	1.7	1.7	1.6	1.7	1.0	1.0	1.4
May	1.9	2.1	2.0	2.0	2.0	1.9	1.0	1.3	1.9
Current data6	2.1	2.2	2.1	2.0	2.1	2.0	1.4	1.4	1.9

1 Inflation expectations derived from the capital market are defined as the ratio between the yields on unindexed government bonds and the yields on CPI-indexed government bonds (breakeven inflation). They include an inflation-risk premium component and various biases deriving from the differences in taxation and liquidity between different types of bonds. For an explanation of how the expectations are calculated click on the following link:

www.boi.org.il/en/DataAndStatistics/Pages/InflationExpectationsExplanation.aspx

Forward expectations are the expectations for the inflation rate over a future period. The forward rates-exp(j,k)-are derived from the breakeven inflation for j years and k years. That is:

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Where exp(j,k) is the forward expectations for inflation from the end of year j to the end of year k. For example, exp(3,5) is the expected rate of inflation from the end of the third year to the end of the fifth year. Exp(k) is the inflation expectation for k years-for example, for 5 years. All expectations data are presented in annual terms.

2Forward expectations for full years, from the end of the third year to the end of the fifth year.

3Forward expectations for full years, from the end of the fifth year to the end of the tenth year.

4The simple arithmetic mean of the inflation forecasts of commercial banks and economic consulting companies that provide their forecasts to the Bank of Israel on a regular basis.

5Expectations derived from the internal interest rates of the five large banks, calculated as the ratio between unindexed interest rates and CPI-indexed interest rates. The internal interest rate is calculated for each bank as the average of its marginal price for raising funds (deposits) and its marginal price for allocating uses (credit).

6For expectations derived from the capital market and expectations based on internal interest rates-average for the CPI month (from the previous CPI reading through the most recent figure prior to the publication of the current CPI); forecasts-the average of forecasts which were revised after the CPI was published.

7One-year expectations derived from inflation contracts-based on the average of market quotes.

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