With massive amounts of money pouring into the capital markets worldwide for more than a decade now, discussion about whether the stimulus package of US president Joe Biden will overheat the economy, and economies worldwide bouncing back from the Covid-19 crisis faster than expected, inflation is set for a comeback.
In Israel, if the dry figures are anything to go by, inflation has yet to rear its head. The Consumer Price Index (CPI) fell 0.1% in January, a smaller fall than analysts expected, and 0.4% over the past 12 months.
Looking ahead, analysts predict inflation of 0.8% over the next 12 months, below the Bank of Israel's target inflation range of between 1% and 3%. The Bank of Israel itself forecasts inflation of 1.1% in 2021 and 1.3% in 2022.
Imported inflation
Mizrahi Tefahot Bank (TASE:MZTF) chief strategist Modi Shafrir told "Globes," "Inflation in Israel over the next year is going to rise mainly because of imported inflation, stemming from a rise in commodity prices worldwide. Only this week Bloomberg's commodity price index rose to a record high since 2013."
"Although the shekel strengthened over the past year, the Bank of Israel halted the appreciation pressure from time to time. Then you've got to add the rise in shipping costs due to supply problems and because of the fact that there is no air freight worldwide because of the Covid crisis. These things are creating imported inflation in Israel.
"If we look at the commodity products component (all of which is imported or competes with imports), which makes up 37% of the CPI, we see that over the past decade there has been in-built negative inflation pressures. Israel is ranked ninth in the world in terms of the cost of living in an era when it is much easier to import and make online purchases from Asia, Eastewrn Europe and even the UK and US, which are cheaper than us. But actually in the next year, because of price rises in China which are spreading around the world, a rise in imported inflation will be recorded and it will reach the target range of the Bank of Israel. If commodity prices will continue to rise at the current rate, which is difficult to assume, inflation will return although moderately."
In its interest rate decision announcement, the Bank of Israel said that inflation expectations are within its target range and in the longer term will reach the middle of its 1% to 3% target range, among other things, because of its expansionist policies.
Shafrir said, "On the other hand, it's important to remember that last year caused many companies to improve their profit margins. We will see the negative aspect of that in the job market - at the end of 2021 the level of unemployment won't return to where it was before the crisis, but at a level of 7%."
So can consumers pay for rising prices, when one in five of all Israelis are outside of the job market? "The social protests of 2011 are still with us in terms of repercussions. Accumulated inflation from 2013 is still negative given that consumers are aware of the cost of living. Companies are fearful of putting up prices but when unpaid leave will end that will moderate the rise in prices in the coming year.
Shafrir sees food prices rising in Israel. "Due to the rise in prices of agricultural commodities, we assume that food prices, not including fruit and vegetables, will rise 1% over the coming year. Due to the awareness of consumers and the media about the cost of living, we will see the marketing chains finding it difficult to raise prices any more steeply unless the jump in the prices of raw ingredients continues."
We'll see a slight rise in food prices in February, a relatively sharp fall in March because of Pesach offers and after that a renewed rise in April."
The Bank of Israel is very satisfied with the anticipated return of inflation as long as it is moderate. Inflation in Israel is lower than in the US and even with the highest forecast for Israel's inflation, the Bank of Israel won't have to think about raising the interest rate.
In its interest rate announcement on Monday, the Bank of Israel said that its commitment to buy $30 billion in foreign currency to weaken the shekel, will help lift inflation into the target range. Shafrir said, "That's correct for 2021 but what will happen afterwards. Will the Bank of Israel continue to buy foreign currency on the same scale? It will probably be difficult to say that and probably it will buy less."
Published by Globes, Israel business news - en.globes.co.il - on February 24, 2021
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