The results of the emergency discussion held by the government regarding raising the price of bread have symbolic significance. Not only is this a basic product under supervision and the government must take care of supplying it for the weaker sections – who are mainly the ones affected by rising inflation – but even if the rise in bread prices is eliminated more is needed to moderate the rate of inflation in Israel. This is in light of the fact that the June index published over the weekend rose by 0.4%, putting the annual inflation rate at its highest level since 2008.
The threatening leakage of inflation to bread prices also symbolizes that inflation in Israel is expanding. Even without raising the price of bread, price increases are flowing beyond food and energy products – that is, core inflation, already here. At the end of the last 12 months, core inflation rose at a rate of 4.1%, which supports the continued aggressive increase in interest rates by the Bank of Israel.
And speaking of the “normal” annual inflation rate, it stands at 4.4% – well above the upper target threshold set by the Bank of Israel at 3%.
And yet, if one is looking for points of light one should also look at what is happening overseas. First, the June index was lower than forecast, accounting for a third of the US price increase – where annual inflation reached 9.1%.
Rental prices: The beginning of an alarming trend
Two main factors stood out in the June price index. One, the housing sector, which recorded an increase of 0.7% and may indicate the beginning of a trend of increases in rental prices. The second factor is that food prices have risen less than expected.
If until now the CBS published the changes in rent according to the average between old tenants in an old contract and new tenants whose rent has changed, now the rate of change of new contracts is also published separately, in order to reflect the change in rent in recent months. This breakdown, according to CBS data, renewed lease contracts paid in June 3% more on average compared to the previous contract. For new tenants, the apartment owners raised the price in a new contract by 6.5%.
Bottom line: The change in the average rent is similar to the increase in the general price index – 0.4%. But looking ahead, the rise may be the beginning of a trend, with so far the jump in housing prices has not trickled down to rental prices.
The “contribution” of the Russian invasion to the index and the cost of living
The surge in fuel prices following the war between Russia and Ukraine is the main story of price increases and the index. Excluding the energy component, the consumer price index rose by only 0.1%. And in general, in the neutralization of energy, the June index is relatively reasonable and generally low relative to the months of the year.
The energy component includes fuel, car oils, electricity, gas, oil and diesel whose weight in the index is a little less than 7%. This increase has implications for additional components, such as the transportation section, which rose 2.4% in June.
The rise in energy components and rents is expected to make it difficult for the Bank of Israel to try to find the cause of real inflation. “A combination of the two puts the Bank of Israel in trouble,” says Ronen Menachem, the chief economist of Mizrahi Tefahot Bank, in a conversation with Globes. “So far, rents have risen at a slower rate than the rise in the index, but in the last month it has risen three and a half times the rise recorded in May. If this continues and rents become an inflationary factor, the Bank of Israel will be in trouble. “.
On the optimistic side, in the near term the energy component is expected to moderate against the background of tax cuts on fuel, alongside the fall in world oil prices in July. Modi Shafrir, Chief Strategist of Financial Markets at Bank Hapoalim, lowered its forecast for the August price index to 0.15% against the background of the expected decline in the price of oil.
Fruits and Vegetables: Do not get excited about falling prices
The June index indicated a sharp decline of 8.5% in fruit and vegetable prices, but it is difficult to attribute this to the reform of lowering the Treasury’s caps but to seasonality, as evidenced by the price of watermelon, which fell by 50%.
Had it not been for the decline in the fruit and vegetables section, the consumer price index would have been 0.7%. Food prices are partly related to food reform but no less to agricultural inputs – and there have been positive developments recently, such as the easing of Ukraine’s access to the sea. At the same time, these effects will be manifested only later.
Pressure Ball: Manufacturers absorb most of the damage
Those who suffer a significant part of the damage from the rise in the index are the manufacturers. The producer price index, which reflects the cost of production to producers, rose in June by 2.5% compared to May. In the past year, the index for manufacturers has increased four times the rate of increase in the consumer price index.
Here, too, fuel prices gave their signals, with the fuel-free index rising by only 1.2% – it is still twice as high as the consumer price index.
Manufacturers are in trouble for several reasons. One, because of government policies that work to reduce barriers, but mainly because of public opinion that makes it difficult for them to raise prices and roll out increases to the consumer. As long as there is a gap to the detriment of manufacturers, they will try to pass on the high cost to consumers, so that the price relief will not come from the good will of the manufacturers to absorb costs but mainly in the short term from lowering fuel costs.
Completion: The consumer’s pessimism will also reach stores
Prior to the publication of the June index data, the CBS published the Consumer Confidence Index, which fell to a significantly lower level on the eve of the Corona crisis. On the economy in the first corona wave, in the first half of 2020. The pessimism of the Israeli consumer has not yet been expressed in stores, but interest rate hikes may also lead there with the belt tightening later.
The results of the interest rate hikes will only be felt in a few months, but this does not prevent the Bank of Israel from raising interest rates consistently without waiting for the results. There are quite a few good reasons for this: not only does the acceleration of core inflation support further interest rate hikes, but wage pressures are raising their heads as a result of the tight labor market – which worries the Bank of Israel, which fears a wage spiral.
Beyond that, the mechanism of curbing imported inflation has been overturned on the economy. After last year the strengthening of the shekel moderated price increases from overseas, the shekel changed direction in the face of declines in the financial markets and no longer curbs price increases but contributes to inflation – as the Governor Prof. Amir Yaron also noted recently.
The weakening of the shekel now has a negative effect on inflation that exceeds the Bank of Israel’s target, and together with the widening of interest rate differentials against the background of interest rate hikes in the United States, all of these support the Bank of Israel raising interest rates further.
Electricity and fuels will drag the July index up
“Although the June index matched expectations, it is one of the most difficult indicators to draw from,” says Ronen Menachem. “On the one hand, there are price increases, which have not yet been reflected in the next two months, such as the electricity tariff. On the other hand, if you look at the world, some commodity prices have fallen sharply and the price of oil has fallen. The June index embodies price increases of the past.
“Beyond that,” Menachem adds, “until the next interest rate announcement at the end of August, a July index will be published that is expected to reflect price increases for electricity, fuels and possibly bread, and it will probably be a high index. If the Bank of Israel wants to raise interest rates. “I guess he’ll do it as soon as possible.”
Apart from the Bank of Israel, the government also has a part in lowering prices in the economy, through reforms and the removal of barriers. The effectiveness of these measures can be measured over time. Meanwhile, the government is operating in the way of tax breaks, which despite their necessity may now be perceived as part of an election economy.