The difference between macro/micro inflation during the war in Israel

Israeli inflation gathered pace in March, the Israel Central Bureau of Statistics reported on Monday, potentially postponing anticipated interest rate cuts.

The annual inflation rate climbed to 2.7% in March from 2.5% in February, surpassing experts' expectations.

The Media Line contacted Ayal Kimhi, a Professor at the Hebrew University and Vice President of the Shoresh Institution for Socioeconomic Research, to understand what the new economic data means.

According to him, the inflation of 2.7% “is just a bit higher than expected. On the one hand, it is good because it indicates the economy is active, but on the other hand, it is a reversal of a trend, which means that the Bank of Israel has to stay alert. It also justifies the decision of the Bank not to lower interest rates last month.” 

A rise in housing prices is a sign of concern 

“An especially concerning sign is the rise in housing prices,” he continued. “The construction sector went almost dormant since October 7th because it relied on Palestinian workers. 

Some people who lost their homes in the attack are looking to live elsewhere, adding to the demand. A housing price boom could bring the Israeli economy to disarray.”

In the long term, there are macroeconomic challenges, according to Kimhi. “Israel’s defense expenditures jumped considerably and will have to stay like that for the foreseeable future. The direct cost of caring for refugees and rebuilding their communities is another considerable expenditure.” 

“The indirect cost of lost working days and business activity is also substantial. Despite the Israeli government approving a budget that tries to stay within reasonable limits of deficit, unfortunately, they failed to divert unproductive expenditures to more urgent and growth-promoting needs for political reasons.

Investments in the high-tech sector decline

“The high-tech sector is Israel's major growth engine. Investments in high-tech have declined dramatically since the beginning of 2023 due to the government’s plan to limit the judicial system's independence, and they have continued to decline due to the war. 

Israel has become riskier for international investors; some take their money elsewhere. This seriously threatens future economic growth,” concluded Professor Kimhi.

Among the items getting more expensive are a one-liter bag of 3% milk from NIS 5.94 to NIS 6.21, sour cream in a 200ml container from NIS 2.63 to NIS 2.75, and 28% fat cheese from NIS 48.95 per kilogram to NIS 51.14 per kilogram. 

The Media Line spoke to Professor Avi Weiss, president of the Taub Center for Social Policy Research in Israel and professor of economics at Bar-Ilan University, to understand why the prices of products with government-controlled prices are about to increase.

“This price increase is targeted only at milk products and was long overdue. Prices will have an adjustment of 4.5% on average to catch up with increasing production costs of 1.5% and past inflation. 

Last year, we were set to increase prices in Israel for these products because prices were going up worldwide, but we negotiated with dairy producers a way out to make this price hike more gradual for the consumers. 

Despite the talent and hard work in Israel’s dairy industry, this price increase is not an award to them. This price adjustment will bring dairy producers back to a sustainable situation,” said Weiss.

“We understand the war is also taking a toll on the economy and Israelis' pockets. We tried to postpone this price increase as much as possible, but if we had not done it now, it would have impacted jobs in the dairy industry. In the long term, keeping price adjustments like this on hold for too long can impact Israel's food security during times of war,” Professor Weiss concluded.

However, the war in Gaza is negatively impacting world trade and its economy. The disruption of shipping lines through the Red Sea makes international trade more costly and slower for consumers and industries in major global markets and Israel.

The Media Line spoke to Dr. Steven Terner, the manager of Terner Consultancy, a leading geopolitical and business consultancy based in New York. 

“As long as the Gaza War goes on, the Ansarallah group in Yemen, known as Houthis, will try to block shipping in the Red Sea. As a result, insurance companies have increased rates for shipping through the Suez Canal and the Red Sea. Consequently, shipping companies that move goods from Europe to Asia are rerouting around the Cape of Good Hope because the insurance rates are more reasonable. 

This adds time delays in the global supply chain. Presumably, if the Gaza War ends, the Ansarallah group will stop blocking shipping, but they may decide to continue for other reasons.”

“Considering the world's lack of harsh counteraction against the Houthis, other extremist groups could adopt this trade-disrupting strategy as well. It is impressive that Israel and the other impacted economies are so resilient,” added Dr. Terner.

The Media Line asked Deloitte Israel's manager for International projects, Marcos Jaimovich, how the Israeli and international economies handle all this pressure on prices. 

According to him, “Israel and the world are resisting well to the war in Gaza because we were in a positive trend until October 7. In Israel, this war’s direct economic impact will be felt for the next three or four years. Sectors of the economy, such as tourism, hospitality, and services, are an important part of the Israeli economy, and they will take a hit just as they started to recover from the Lockdown policies during the COVID-19 pandemic.”

The Media Line asked the founder and chairman of Leket Israel, Joseph Gitler if there was anything the Israelis and the Israeli government could do to help slow down price increases. 

“In the short term, there is nothing we can do. Wastefulness is at the core of most economic problems. If we were less wasteful, price increases and inflation would be smaller,” he said.   “On a larger sense, the question is how to become less wasteful, individually and as a society, both the rich and the poor. Do you incentivize consumers and brands to be frugal? Do you punish them for being wasteful? With individuals who can afford to be wasteful, various incentives can reduce wastefulness. However, with people who can’t afford to be wasteful, reducing their wastefulness requires educational and behavioral investments,” he concluded.