Strong shekel keeps US-style inflation at bay

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative

The appreciating shekel is neutralizing global factors leading to price rises elsewhere.

The inflation figures released in the US on Friday indicated a price rise not seen since the days of President Reagan. Inflation in the past twelve months in the US was almost three times as high as the rate of inflation in Israel in that period.

The annual inflation rate in the US reached 6.8% in November, which compares with 6.2% in October. This is the highest reading in four decades. Inflation is on the rise not just in the US, but all over the world, and finance ministers of the G7 countries are due to meet this week to discuss the consequent risks.

Israel a standout

Where is Israel in this story? In a good place at the bottom. The inflation rate in Israel is still within the Bank of Israel's target range of 1-3%. How is that possible? Israel is not exempt from the factors causing the rise in inflation, such as the global supply chain problem, the rise in raw material transportation costs, and so forth, but several moderating factors helped Israel to restrain inflation and keep it to an annual rate of 2.3% in October. We should preface the explanation by saying that the Consumer Price Index published by Israel's Central Bureau of Statistics does not include housing prices, which are booming.

The slowdown in the rate of inflation in Israel in October was mainly thanks to a surprising drop in the tourism and aviation item, which lopped 0.3% off the general index. October's surprising figure reflects the contribution of the strong shekel, which acts to make air fares cheaper. Beyond that, the appreciation of the shekel put the brakes on price rises, and strengthened Israelis' purchasing power overseas. In the last quarter, the shekel appreciated by 2.5% against the basket of currencies of Israel's main trading partners (known as the effective nominal rate of exchange), which helped in coping with rises in prices of imported goods.

Supermarket chains make a U-turn

Another factor that is tending to moderate inflation locally is the effect of the investigations in the food industry. With suspicions of price fixing hovering over the sector and managers of food companies being summoned for questioning by the Competition Authority, the chains have retreated from their declared intentions of raising prices.

Food importer Diplomat, for example, stated that it would not raise prices despite the shipping challenges, the effect of which it described as "not material". Diplomat went further, stating that the company's suppliers had not raised prices, and that it itself was carrying out streamlining measures.

After its CEO had made headlines with his declaration that price hikes were unavoidable, supermarket chain Victory stated on the publication of its quarterly financials that is was making every effort to maintain cheap prices and not to raise them despite rises in input costs.

Another food importer, Williger, issued an urgent statement, even before the release of its financials, to the effect that the company had decided to absorb the price rises, and this after company CEO Zvi Williger, following the Shavuot holiday in May, declared that there was no choice but to raise prices given the rise in raw materials costs and a tenfold rise in shipping costs. After the social protests in Israel in 2011, which gave rise to a committee whose recommendations have yet to be implemented, the bottom line is that it's still hard to raise prices here.

Unlike Europe, no gas crisis

The rise in energy prices has become a real threat to economies around the world. Crude oil recently hit a seven-year high, and natural gas prices have almost doubled in the past six months, bringing them to a seven-year high as well, raising fears in Europe of supply difficulties as an especially cold winter approaches, and coal prices too are at a peak.

Theoretically, the rise in energy prices could further fuel inflation, weigh on consumer spending, and possibly lead to an economic slowdown.

The Omicron coronavirus variant has, however, cooled the energy market, leading to a fall in prices amid fears of a slowdown in demand. The price of a barrel of oil, which touched $85 in mid-November, is now around $70.

Fuel price rises affect raw material and shipping prices, which of course also affect the local market, but the declines in the past few weeks have acted as a brake on inflation. As for gas prices, while Europe fears a cold winter, Israel benefits from gas at fixed prices from its offshore gas reservoirs.

Bank Hapoalim chief economist Victor Bahar writes, "The rise in the Consumer Price index in the US has been almost three times as great as in Israel over the past year. The appreciation of the shekel and natural gas prices largely explain the gap. As in the US, in Israel too average pay has risen by 10% in the past two years, and there's a labor shortage. So some of the background conditions are similar.

"But if you look at housing, for example, prices in the past year have risen 3.8% in the US, and by half that, 1.9%, in Israel. Price of clothing have risen 5% in the US in the past year, and in Israel they have fallen by 3.7%.

"It's difficult to explain the large gaps in these two items, and if the US index is any indication, perhaps we'll see accelerated rises in these two items in the next few months. Food prices rose 6.1% in the US, and by just 3.2% in Israel, but that gap might be explicable by the appreciation of the shekel and by greater competition between the supermarket chains.

"The bond market in Israel is pricing in inflation of 2.5% annually over the next five years, a slightly lower rate than that implied by the US bond market, which s 2.8%. The financial markets are currently pricing in a risk of high global inflation, on the assumption that central banks around the world will continue to avoid taking a determined anti-inflation stance."

November's CPI reading

This week, the CPI reading for November will be published in Israel. Mizrahi Tefahot Bank chief strategist Modi Shafrir estimates a 0.1% rise in the index, giving a 2.6% annual inflation rate. "The CPI reading for November this year will be high in relation to previous years. Fuel prices rose 3.6% in November, and that will add 0.11% to the general index.

"On the other hand, they will depress the December index by a similar percentage, and will depress the January index by about 0.05% as well. The forecast for inflation over the next twelve months is 1.9%, with a more substantial fall in inflation expected towards 2023, because of pressures tending to strengthen the shekel, expectations that global supply problems will be solved, and the start of implementation of the imports and regulation reform designed to cut the cost of living."

Published by Globes, Israel business news - en.globes.co.il - on December 13, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative
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