Strong shekel keeps U.S. inflation at bay

Inflation figures released in the United States on Friday indicated a price hike unprecedented since the days of President Reagan. Inflation over the past twelve months in the United States was almost three times the rate of inflation in Israel during that period.

The annual inflation rate in the United States reached 6.8% in November, down from 6.2% in October. This is the highest reading in four decades. Inflation is on the rise not only in the United States, but around the world, and G7 finance ministers are due to meet this week to discuss the risks associated with it.

Israel stands out

Where is Israel in this story? In a good place downstairs. The inflation rate in Israel is still within the Bank of Israel’s target range of 1-3%. How is it possible? Israel is not exempt from the factors causing the rise in inflation, such as the problem of the global supply chain, increasing costs of transporting raw materials, etc., but several moderating factors helped Israel contain inflation and keep it at an annual rate of 2.3% in October. We should preface the explanation by saying that the consumer price index released by Israel’s Central Bureau of Statistics does not include house prices, which are booming.

The slowdown in the inflation rate in Israel in October was mainly due to a surprising drop in tourism and aviation, which fell 0.3% compared to the general index. The startling figure for October reflects the contribution of the strong shekel, which makes air fares cheaper. Beyond that, the appreciation of the shekel has slowed the rise in prices and strengthened the purchasing power of Israelis abroad. In the last quarter, the shekel appreciated 2.5% against the basket of currencies of Israel’s major trading partners (known as the effective nominal exchange rate), helping to keep pace with the rising prices of imported goods.

Supermarket chains are turning around

Another factor that tends to moderate inflation locally is the effect of surveys in the food industry. While suspicions of price fixing hover over the sector and agribusiness executives are summoned to be questioned by the Competition Authority, the chains have backed down on their stated intentions to raise prices.

Food importer Diplomat, for example, said it would not raise prices despite shipping issues, the effect of which it called “not significant.” Diplomat went further, saying the company’s suppliers had not raised prices and that it was leading downsizing measures itself.

After its CEO hit the headlines by declaring price hikes inevitable, supermarket chain Victory said in releasing its quarterly financial data that it is doing everything to keep prices low and not not increase them despite rising input costs.

Another food importer, Williger, issued an urgent statement, even before its financial statements were released, that the company decided to absorb the price hikes, after the company’s CEO, Zvi Williger, following the Shavuot holiday in May, said there was no choice but to raise prices given the rising cost of raw materials and a tenfold increase in prices. Shipping fees. After the social protests in Israel in 2011, which gave birth to a committee whose recommendations have yet to be implemented, the result is that it is still difficult to raise prices here.

Unlike Europe, no gas crisis

Rising energy prices have become a real threat to economies around the world. Crude oil recently hit a seven-year high, and natural gas prices have nearly doubled in the past six months, also taking them to a seven-year high, raising fears in Europe of supply difficulties to the A particularly cold winter is approaching, and coal prices are also at an all-time high.

Theoretically, higher energy prices could further fuel inflation, weigh on consumer spending and possibly lead to an economic slowdown.

The Omicron variant of the coronavirus has cooled the energy market, however, leading to lower prices amid fears of slowing demand. The price of a barrel of oil, which was close to 85 dollars in mid-November, is now around 70 dollars.

The increases in fuel prices are affecting the prices of raw materials and shipping, which of course also affect the local market, but the declines in recent weeks have acted as a brake on inflation. As for gas prices, while Europe fears a cold winter, Israel is profiting from fixed-price gas from its offshore gas fields.

Bank Hapoalim chief economist Victor Bahar writes: “The consumer price index in the United States has risen almost three times as much as in Israel over the past year. The appreciation of the shekel and natural gas prices largely explain the difference. in the United States, in Israel too, the average wage has increased by 10% in the last two years, and there is a shortage of manpower. So some of the basic conditions are similar.

“But if you look at housing, for example, prices last year went up 3.8% in the United States, and by half, 1.9%, in Israel. The price of clothes was up 5%. % in the United States last year, and in Israel, they fell 3.7%.

“It’s hard to explain the large differences between these two elements, and if the US index is any indication, we may see an acceleration of the increases in these two elements in the coming months. Food prices rose 6.1% in the United States, and only 3.2% in Israel, but the gap could be explained by the appreciation of the shekel and more competition between supermarket chains .

“The bond market in Israel anticipates inflation of 2.5% per year over the next five years, a rate slightly lower than that implied by the US bond market, which is 2.8%. Financial markets currently anticipate inflation risk, on the assumption that central banks around the world will continue to avoid taking a determined anti-inflationary stance. “

November CPI reading

This week, the CPI reading for November will be released in Israel. Mizrahi Tefahot Bank chief strategist Modi Shafrir estimates a 0.1% increase in the index, resulting in an annual inflation rate of 2.6%. “The CPI reading for November of this year will be high compared to previous years. Fuel prices rose 3.6% in November, which will add 0.11% to the overall index.

“On the other hand, they will depress the December index by a similar percentage, as well as the January index by about 0.05%. The forecast for inflation over the next twelve months is 1, 9%, with a more substantial fall in inflation.expected around 2023, due to pressures to strengthen the shekel, expectations of resolving global supply issues and the start of implementation of import reform and regulations aimed at reducing the cost of living.

Posted by Globes, Israel business news – – December 13, 2021.

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

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