The Hausers were looking to buy a home. To reduce the interest from mortgage payments, Mr. Hauser turned to a wealthy relative, Mr. Goldman, and asked for an interest-free loan of $180,000. Mr. Hauser agreed to repay over 15 years, at $1,000 a month.
"I am willing to grant you the loan," replied Mr. Goldman. "I will not ask for any interest, even through a heter iska."
"That's great!" exclaimed Mr. Hauser.
"However, since this is a long-term loan, I would like to link the repayment to the consumer price index," added Mr. Goldman. "In Israel, this is known as hatzmadah lamadad."
"What do you mean?" asked Mr. Hauser.
"There is usually inflation," explained Mr. Goldman. "If, for example, inflation is an average of 2% a year, in another year $1,000 will have only about $980 of current purchasing power, $960 in two years, $900 in five years, $800 in ten years, and $700 in fifteen years. Even if you pay back a total of $180,000, I will suffer a great loss of purchasing power over the years.
"By linking the loan to the CPI, you cover the yearly inflation," continued Mr. Goldman. "You pay about $1,020 a month next year, $1,040 in two years, $1,100 in five years, $1,200 in ten years, etc. This way, I maintain my original purchasing power. It's still way less than the 6% interest rate that banks charge for a mortgage.
"That seems fair," said Mr. Hauser, "but I'm concerned that there is an issue of ribbis. I'll end up repaying more than I borrowed!"
"Poskim, over the centuries, have addressed the issue of monetary changes," replied Rabbi Dayan. "Much of the discussion involves an official, across-the-board, governmental devaluation of the currency. The poskim dispute whether the borrower returns the original sum, despite the devaluation, or the initial value by paying more of the devaluated currency (Rema C.M. 74:7).
"Regarding inflation, though, the Gemara (B.M. 44b) teaches that currency is considered stable, and the fluctuation of prices is attributed to the commodities (Chazon Ish Y.D. 74:5).
"Igros Moshe (Y.D. 2:114) maintains that this applies not only to silver coins, as in the time of the Gemara, but even to paper currency nowadays, because regarding currency, the rule of dina d'malchusa dina certainly applies.
"Thus, the consensus of poskim is that the borrower should return only the initial sum that he borrowed, despite inflation. Stipulating that he pay according to the consumer price index (or hatzmadah lamadad in Israel) may be done only through a heter iska. Otherwise, it is considered by many as ribbis ketzuzah that is prohibited d'oraysa (Bris Yehudah 20:1-3; The Laws of Ribbis 2:3).
"The loss of purchasing power is not comparable to an actual expense incurred in granting the loan (such as legal fees), which the lender is permitted to recoup (C.M. 39:17).
"In times of excessive inflation, as in Israel decades ago, it was common to initially convert the loan into a stable currency that was widely used, such as the dollar, and stipulate that the borrower is required to return that same amount of dollars at the time of repayment, even if he ultimately chose to pay in shekalim (Shevet Halevi 3:109).
"Regarding sales, though, when the customer does not yet take possession of the item, it is permissible to link the price to the CPI at the time of payment (Rema Y.D. 173:14).
"However, when the customer already takes possession of the item, although the prohibition of ribbis in sales is usually Rabbinic, the purchase price should not be linked to the CPI at the time of payment," concluded Rabbi Dayan. "A heter iska is needed, or, alternatively, the initial price should be stated according to the CPI at the payment date, without an immediate cash price" (Bris Yehudah 24:[18]; The Laws of Ribbis 6:19; Toras Ribbis 8:19, 19:48).
Verdict: Halacha views currency as stable, and inflation as a fluctuation in the price of commodities. Thus, linking a loan to the CPI is considered ribbis; a heter iska is necessary.