After seven years of deflation, prices are rising at a rate not seen for a decade, and inflation will approach 2% this year. This is not a situation unique to Israel: in the US, the Consumer Price Index has risen by 4.2% over the past year.

Israel’s Consumer Price Index, which measures changes in price of a basket of household items each month, rose less than expected in April, which served to calm fears, but inflation for January to April was 1.1%.

Inflation describes a situation of continuing price rises, as opposed to one-time rises caused by the economy adjusting to various shocks. The question is whether the current price rises are a one-time event, or whether they represent the start of an inflationary trend.

On the one hand, price rises are described by central banks for the time being as adjustments in items that fell over the past year because of lockdowns imposed to curb the spread of the coronavirus pandemic, such as tourism, leisure and entertainment. Disruptions to global supply chains also caused rises in shipping prices. On the other hand, the release of suppressed demand as economies reopen, alongside fears of constraints on supply because of supply disruptions, bring in train expectations of price rises to come.

Money printing to finance fiscal deficits continues, and it could set off global inflation. Governments have an interest in eroding the value of debt through inflation, and a continuation of expansionary policies will contribute to that. In addition, the fact that people are leaving the workforce generates upward pressure on wages. The number of vacant jobs in the Israeli economy has reached a record level (130,000) while almost 500,000 people are sitting at home on state support that is likely to continue.

Inflation expectations as derived from the capital market in Israel have jumped within a year from minus 0.8% to plus 2%. This is an unusually sharp rise, although understandable given the huge support by central banks over the past decade and during the coronavirus period, together with the reopening of the economy. The question is whether the central banks will succeed in timing a cooling of the economy before it overheats. It may be that unless the central banks change policy, we shall see continuing price rises, while the banks’ mantra is that interest rates will remain low for a long time.

The debate over whether the price rises we are seeing at temporary or not will be decided in the coming months. For the time being, the Bank of Israel is not worried about an outbreak of inflation, and the April CPI reading showed that, for now, its approach is right.

Published by Globes, Israel business news – en.globes.co.il – on May 30, 2021

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

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