The rate of inflation in Israel appears to be better than in most Western countries. The Consumer Price Index (CPI) reading for September indicated an annual rate of 4.6%, less than half the rate in the EU and the UK, for example, and much lower than in the US. But does this faithfully reflect Israel’s true position in relation to the rest of the world? At least as far as rents are concerned, the answer is probably no.
In the September CPI figures, rents rose 0.7%, making it a 5.6% rise over twelve months. It could be, however, that the upward pressure in rents is much greater, but landlords are waiting for current leases to end and to switch tenants. In other words, the rises we have seen so far may well be only the tip of the iceberg.
According to the Central Bureau of Statistics, 84% of tenants have ongoing leases, and so as far as they are concerned rents were unchanged in September. For 12% who renewed leases on their existing homes, rents rose 3.5%, and for 4%, who were new tenants, the rent for the property rose 8%.
"Core inflation in Israel is not materially different from the rate elsewhere in the world," says Meitav Dash chief economist Alex Zabezhinsky. A survey he published shows that in services and rents, the rate of inflation is no lower than in other countries, by contrast with product prices.
"Prices of food items, including fresh produce, rose by 3.3% in Israel over the past year, much less than in the US, Europe, the UK, Canada, and even Japan. Furniture and equipment prices also rose by less in Israel than elsewhere. Clothing prices actually fell 3.8%, which compares with rises in other countries," Zabezhinsky says. "On the other hand, the rise in services prices in Israel was not small, comparatively. The rise in home rents in Israel over the past year was only lower than in the US."
Services are different
The services sector is different. Services are something we create, and there is no necessary connection to what happens overseas. Inflation in services prices is in general more consistent. "The rise in services prices shows that inflation could be no less sticky here than in other countries," Zabezhinsky explains.
"In rents, there is no deceleration. In the US, one can see signs of it, but there are none here. The prevailing assumption is that in a year’s time inflation in Israel will fall to about 3%, but when you look at services, doubts arise," he says. Housing accounts for a quarter of the CPI, and for general inflation to fall, there has to be a fall in this item.
"Inflation has gone from the products side to the services sectors," Psagot macro-analyst Matan Shitrit agrees. "The easing up on the supply side around the world is moderating inflation in product prices. The bottleneck in the supply chain is freeing up, the shortage of microchips that led to the rise in electronics components prices is receding, and shipping prices are on a downward trend and are approaching the levels they were at before the crisis that broke out in 2020."
Why is the services sector, and rents in particular, heating up so much? The cause lies in, among other things, the sharp decline in sales of new homes. For example, according to Central Bureau of Statistics figures, in August this year 2,780 new homes were bought in Israel, nearly 50% fewer than in August 2021. This is the lowest rate of sales since June 2020. "Purchases of new homes are grinding to halt. This applies both to young couples and to investors. Hence, demand for rentals is rising," says Zabezhinsky. Besides demand, the rise in home prices - 19% in a year - makes landlords look for higher returns.
"The rise in rents is natural, given the rocketing housing prices," says Shitrit. "In addition, the Central Bureau of Statistics has started to publish more details of the housing item, and states in what percentage of its sample there was a change of tenant and in what percentage the lease was renewed. In the most recent CPI figures, the rise in rents where there was a change of tenant was 8%. It is likely that this kind of increase will continue at least for the next few months."
Product prices will rise
Why is there a gap between prices of goods and of services? Product prices are affected by many factors, such as the strength of the shekel and supply chains. Zabezhinsky says that higher inflation might have been expected in product prices, but in practice this did not happen.
It is, however, likely to happen soon. Suppliers and importers have already announced intentions of raising prices. Shitrit explains that the fall in food items in September partly stemmed from special offers at supermarkets in advance of the Jewish holiday season. "The wave of price increases is about to take place at a time when commodity and shipping prices around the world are on a downward trend," Shitrit says. "The explanation is that food prices respond with a delay of a few months to falls in commodity prices."
Another element that should be noted is the cancellation of the reduction in excise duty on fuel by the Ministry of Finance. At present, the reduction is NIS 0.79 per liter, and it is due to end on November 15. "If that happens, it will contribute 0.4% to the annual inflation rate - 0.2% in November and 0.2% in December," says Shitrit. It remains to be seen whether or not the discount will be extended.
Other services for which prices are rising are health and education. In health, there is an inflationary dynamic, since premiums for private health insurance policies are linked to the CPI. "Alongside this, the agreement with the teachers, and upward pressure on wages in general, represent an additional threat," Shitrit says.
Published by Globes, Israel business news - en.globes.co.il - on October 25, 2022.
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