Our inflation (in Israel) is 2.8% and still within our target range. Even if we see indices that bring inflation above the range, our expectation is that inflation in the second half of 2022 will fall in the direction of the target range.

Andrew Abir, Deputy Governor of the Bank of Israel

And the experienced economist makes a fair point. Israel’s inflation rate is still relatively low. Look at America, which has just announced the highest set of price hikes in decades. It is now assumed that planned interest hikes will be brought forward. The Europeans are still trying to work out how temporary (or otherwise) this period of inflation is likely to be.

If you ask the average person on the street in Israel – if there is such a creature – they will tell you that the distinguished economist obviously does not do the shopping in his household. The government has just been forced to apply enormous pressure on major food manufacturers and food importers to postpone or delay previously announced price hikes. In addition, Israel’s Minister of Finance has proposed a series of measures to put extra spending money into the pockets of the less financially secure.

The irony of many of these measures is that much of the extra cash will serve to boost the profits of the large retail grocery outlets. That is where it is assumed that much of the money will be spent.

However, few of these measures will dent what is called inflationary expectations. There are two reasons for this. First, however strong the shekel is against many of the major currencies, the prices of imported raw materials are soaring. Similarly, even if the cost of international freight comes down from its peak, it will remain way above pre-corona rates. All the shops are stuffed full of overseas products.

What can the policy makers in Jerusalem do?

There are two fundamentals that determine what happens in the economy. And throughout the country’s history since 1948, few politicians have dared to tackle these vested interests.

First, the price of land and the hidden costs of planning a new building remain high. Why? Because between them, they bring in to the treasury vast amounts of tax revenue. Eventually and inevitably , shop owners pass on these expenses to their customers.

Second, the country is full of protected interests. High import duties on fruit and vegetables protect the farmers, even when products may not be in season. Antiquated union practices ensure that the ports of entry are expensive to run. Importing procedures are complex (bureaucratic) and thus also expensive, prohibiting new entrants into the markets. (It would take me a separate blog for me to explain the procedures to import tinned food into Israel – labels, samples, approvals from at least 3 ministries, and more).

The common denominator of the two factors is the lack of competition. And thus the cost of living in Israel remains high – absolutely and comparatively. And now you know why Israel has some of the greatest differences in wealth between those who have and have not.

But just who can and wants to see that?