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Israel's dizzying inflation: indexed incomes help some

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Two merchants sat on chairs outside their adjoining furniture stores this month playing backgammon while a third merchant kibbutzed. There were no customers to disturb them.

The merchants on Herzl Street in downtown Tel Aviv were trying to cope with an inflation rate running above 130 percent annually by hanging on. More than 500 merchants had given up coping in the Tel Aviv area alone in the past year, closing their businesses. According to the local Chamber of Commerce, another 120 wholesalers and importers have done likewise.

Some of the businessmen have invested their money in the securities market. Others have salvaged the capital they could and emigrated. Those who remain in business have had to run a treadmill on which income is not sufficient to replenish inventory because of prices that climb every week.

"I once thought I understood business," said one of the backgammon players. "Today even a professor couldn't understand it."

The most astonishing aspect of the inflation, however, is that the country is still coping with it at all, and doing so pretty well. The principal reason is the automatic linkage of salaries to the cost-of-living index. The linkage covers 80 percent of the index rise and is adjusted every three months. Furthermore, the redemption price of bonds is fully linked to the index and thus offers a secure shelter for capital.

If 130 percent inflation thus does not mean being dragged behind a runaway horse, it does mean a steadily binding vise as 80 percent linkage fails increasingly to keep up with prices. Businessmen are often harder hit than wage earners by the fall in purchasing power.


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