Annual inflation in Israel seen hitting 4% in April

Slowdown Photo: Shutterstock
Slowdown Photo: Shutterstock

With rising commodity prices and a global slowdown caused by the Russian invasion of Ukraine, the haunting specter of stagflation could be on the horizon.

The inflationary environment in Israel is lower than in the US and Europe, due to the strength of the shekel and lower sensitivity to energy prices. Nevertheless, the level of inflation in Israel is expected to continue climbing above the 3% upper limit of the Bank of Israel's annual target range due to the Russia-Ukraine war and the sharp rise in commodity prices.

Annual inflation in Israel is currently at 3.1%, just above the target range, but the continued rise in commodity prices and especially oil is forecast to lift annual inflation in Israel to 4% by April. Fuel prices alone will add 0.2% to the March Consumer Price Index (CPI), which will be published in April, analysts predict.

The precarious geopolitical situation in Eastern Europe will also affect food, shipping and raw materials prices and could lead to a global slowdown in growth.

At a time when central banks, led by the US Federal Reserve, are weaning markets from the financial support provided during the Covid pandemic, they have run out of ammunition to cope with the latest crisis. The central banks are caught in a trap. If before the Russian invasion of Ukraine there was a need to raise interest rates in order to restrain inflation stemming from the disruptions caused by Covid, Russian president Vladimir Putin's aggression is now fueling even higher inflation.

The concern that the central banks have been slow to raise rates in order to combat inflation is being reinforced by the crisis in Europe and higher rates could weigh on the economy and result in stagflation - inflation combined with an economic slowdown.

On the local market, the Bank of Israel has already indicated a rate hike in the coming months despite estimates by the decision makers in the bank that inflation will fall later in the year. It will be interesting to see if the Bank of Israel revises its inflation forecast in light of the situation in Russia and the Ukraine or whether it will choose to view it as a transient, exogenous event. It is reasonable to assume that the Bank of Israel will revise its inflationary forecast upwards.

Published by Globes, Israel business news - - on March 9, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Slowdown Photo: Shutterstock
Slowdown Photo: Shutterstock
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