Friday 31 March 2023

The Worst of Israel's Inflation May Be Behind Us, but Other Problems Loom

Global energy prices are down and supply chain problems seem to be fixing themselves, yet the largest issue for the Israeli economy is the rising price of housing.

Anyone following Israeli inflation numbers over the last several months can’t help but think we’re hurtling into an inflationary spiral, all the more so after Monday when the Central Bureau of Statistics reported that consumer prices jumped 5.2 percent year-on-year in July, Israeli daily Haaretz reported.




Of course, apart from economists, who were taken by surprise by how big the July number was, not many people actually follow the monthly rate, so here it is in abbreviated fashion: Last fall, prices were rising at an annual rate of between 2.2 and 2.5 percent; by February the pace had picked up to 3.5 percent and in May it pushed past 4 percent. Now, at over 5 percent, it’s reached its highest since 2008.


Since Israel is light years away from the hyperinflation of the 1980s, we’re currently contending with higher inflation than we’ve known for more than a decade, and the pace has been accelerating.


The public is anxious, with polls showing voters are more concerned about the economy and the cost of living than they are about Iran. With an election just two-and-a-half months away, Prime Minister Yair Lapid is running scared, and Benjamin Netanyahu is running on scare tactics, with talk about a hapless government doing nothing in the face of a crisis.


But is the situation really that out of control?


There are signs that July may have marked the peak of the inflation surge. The U.S. consumer price index, which has been rising at about twice the Israeli rate, made a small but significant move lower in July to an 8.5 percent year-on-year increase. The reason was a sharp decline in world energy prices, which have fallen by close to a third over the last two months. The price of oil not only affects the cost of filling up your car’s tank, but raises the prices of everything from vacations to plastic goods.


Housing prices in Israel soared more than 17 percent between Summer 2021 and Summer 2022.


The Bank of Israel, for one, has lifted its base lending rate three times this year to 1.25 percent and is expected to continue doing so. Economists are predicting a hike of 0.5 and maybe (because of the unexpectedly high July CPI) as much as 0.75 percentage point next Monday.


The fact is that even if exogenous factors, like energy prices and improving supply chains, favor lower inflation, domestic factors are conspiring to lift prices. Economic growth remains very strong in the face of the Bank of Israel rate hikes. Indeed, the Central Bureau of Statistics reported a day after the CPI that preliminary figures show that gross domestic product grew at an unexpectedly strong 6.8 percent annual rate in the second quarter, greatly reversing a first-quarter contraction.

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