Treasury sees jump in inflation

inflation

One of the main factors in expected price rises is the release of pent-up demand as coronavirus restrictions are lifted.

The rate of inflation in Israel will be 2.2% in 2021 and 1.5% in 2022, according to the Ministry of Finance Chief Economist's review published today. This is a higher forecast than that of the Bank of Israel, which expects an inflation rate of 1.3% in 2021 and 1.2% in 2022, according to the latest forecast published by the central bank's Research Department, in April. The Bank of Israel forecast is for the final quarter of 2021 versus the final quarter of 2020, and will probably be revised shortly.

The rate of inflation implied by prices in the derivatives market is 2% over the next twelve month, while the implied inflation rate in the bond market is nearly 2.3%, such that the Ministry of Finance's projection is not far from that of the financial markets.

According to the Ministry of Finance, it is difficult at this stage to tell whether we are looking at a temporary rise in inflation expectations or a rise in the probability of higher inflation in the medium and long terms. "In the coming year, we will see a rise in inflation because of the recovery of the economy, a rise in private consumption largely arising from growth in savings, and a rise in the price of energy," the review states.

"One of the most significant factors in the rise in short-term inflation expectations may be the substantial growth in household savings in 2020 (by 11% in Canada, over 9% in the UK, 8% in the US, and 8% in Israel) resulting from the restrictions that reduced spending opportunities, government economic aid to households and businesses, and uncertainty over future income. With the lifting of restrictions and the decline in uncertainty, private consumption is likely to grow rapidly as suppressed demand is released, causing a rise in prices. This trend is accompanied by growth in government consumption as a result of expansionary fiscal policies (especially in the US)."

The ministry also estimates that a lack of investment during the coronavirus period has led to reduced production capacity, which will cause higher prices globally and in Israel.

"Despite the appreciation of the shekel during 2020 (by about 5%) the global rise in commodity prices is also imported into Israel. Imported inflation combined with stronger demand in Israel will cause a rise in inflation to some degree in the short term," the Ministry of Finance review states.

"In 2022, we expect that the temporary effects will moderate, alongside the unemployment rate, government aid, and appreciation of the shekel. We estimate that the rate of inflation will be 1.5% in 2022," the review continues.

Published by Globes, Israel business news - en.globes.co.il - on June 6, 2021

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

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