Hyperinflation and the 1985 Stabilization Plan

By mid-1985, Israeli inflation was running at close to 500 percent a year, and officials feared the economy was sliding toward outright hyperinflation after a decade of chronic high inflation rooted in large fiscal deficits and automatic wage indexation. On July 1, 1985, the government of Shimon Peres, working with central bank and treasury economists including Michael Bruno, launched a stabilization plan combining a temporary freeze on wages and prices, a sharp fiscal contraction, and a new exchange-rate anchor rather than a purely monetary target, reasoning that the public's demand for cash was too unstable in a near-hyperinflationary environment to rely on money-supply control alone. Within about two months, annual inflation fell from roughly 500 percent to under 20 percent, achieved with comparatively mild damage to employment and output. The 1985 plan proved durable: Israel never again approached hyperinflation, and the episode became a reference case, studied by the Bank of Israel itself, for how a credible, multi-pronged shock program can break an entrenched wage-price spiral faster than gradual disinflation.