Inflation is running at 7% annually in the US, the highest in 40 years and at 5.4% annually in the UK, the highest in 30 years. In Israel, housing prices are rising at a double-digit percentage rate annually and food prices and electricity rates are on the rise. But the Bank of Israel insists that inflation will only be 1.6% in 2022, after a relatively modest 2.8% in 2021, even though central banks worldwide are back tracking from their original estimate that inflation is a passing phenomenon. So why are Israeli economists so confident that inflation will fade in the coming weeks?
Israeli thinking rests on several pillars: the strengthening shekel; fixed natural gas prices; containing salaries; and the awareness of politicians and regulators to public sensitivity over the cost of living.
The shekel is likely to strengthen even more in the near future. If Israel joins MSCI’s Europe Index, then foreign investors are expected to invest billions of dollars in Israeli shares. On the other hand, many analysts point out over the past year the correlation between the strength of the shekel and the flow of capital into the Israeli tech sector and companies traded on the Nasdaq in the US, but the anticipated series of interest rate rises in the US poses major questions about the continued positive trend in these areas.
Another major factor is the price of energy in Israel, which in contrast to Europe, is maintaining stability, mainly due to the fixed price at which natural gas from the Tamar and Leviathan fields is sold to the domestic market. In this context, it should be pointed out that the US produces the gas and oil that it consumes and despite that annual inflation there is about 7%.
Two other variables with a major impact on inflationary pressures are salaries and the role of regulation. On the first point, Minister of Finance Avigdor Liberman has reason to be satisfied from the agreement with Histadrut chairman Arnon Bar-David to freeze salaries in the public sector for a year as part of an overall economic package deal. Although salaries in the tech sector are rising fast, the effect is not spilling over into other sectors.
The second factor is the major sensitivity in Israel to the cost of living, which is expressed in the public anger aroused in response, for example, to rise in grocery prices. Public pressure pushes the politicians and influences the regulators. Consumers may be sensitive to prices rises at the cash tills and on the shelves but the situation would be far worse were it not for the public’s response. Analysts have clearly that shown that the price rises in goods and products around the world have only partially been passed onto the Israeli consumer, even after the appreciation of the shekel is taken into account, which indicates that the suppliers are absorbing some of the rises. Utility rates would also have risen more, if the politicians had been indifferent to the matter.
The explanations of the economists would seem to be convincing. But there are always the unexpected factors that can alter the picture, while there are those who argue that the Consumer Price Index (CPI), as calculated by the Central Bureau of Statistics in Israel, does not accurately reflect the true picture about the rise in the cost of living.
Published by Globes, Israel business news - en.globes.co.il - on January 20, 2022.
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