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A sharp 1.1 percent increase in the April consumer price index was disappointing because we've become accustomed to inflation figures of zero or below in the past 18 months. But the question now is whether the April CPI indicates a transition to inflation and loss of price stability - or is it a blip, just a one-time price adjustment?

Inflation exists when prices keep rising over time, month after month, not just once. For this, there needs to be surplus demand in the economy - by the government (the budget), the public (private consumption), investments or exports. The moment excess demand appears, manufacturers and merchants see their products being snatched off the shelves and they raise prices, time after time, thus creating inflation.

But in the current situation, the budget is in check and the deficit this year will be smaller than it was last year. Private consumption is also low because unemployment is still high and employers are not in a hurry to increase their workers' salaries. The recent tax reductions (VAT and income tax) improve available income a bit, boosting private consumption, but not to a significant degree. Investments are also still at a nadir. There is growth in high-tech exports, but this comprises only a small part of the economy. The bottom line, therefore, is that there is no surplus demand in the Israeli economy. This means the April inflation figure does not mark a transition to inflation, just a price adjustment.

Most of the CPI increase in April derives from the rising cost of oil in the world, with the price of a barrel of oil reaching $40, and the rapid devaluation of the shekel. More expensive oil makes electricity and other products more costly. The weaker shekel has a wide impact on prices in the economy due to the heavy reliance on imports for raw materials and consumer goods.

So, we don't need to do anything? Not exactly. To ensure that this is indeed a one-time occurrence that does not snowball into inflation, the finance minister must make sure that we don't get stuck in the same vicious circle we suffered in past years. This vicious circle begins with price increases, which precipitate cost-of-living increases in public sector salaries, which in turn lead to wage increases in the private sector, which reduces the profitability of exports and in the incentive to export, which leads to a shortage of dollars and, consequently, the devaluation of the shekel against the scarce dollar. This devaluation leads to price increases, thus completing the vicious circle - with inflation.

This circle must be broken in the area of public sector salaries. If the finance minister buckles under pressure and restores the wages trimmed from senior public sector officials and raises teachers' salaries (and the rest of public sector wages in their wake) - the vicious circle will be activated and we'll find ourselves in an inflationary spiral again.

Even after the high April CPI, an inflation rate of 2-2.5 percent is still expected in 2004, and this falls within the inflation range targeted by the government. And because this is so far just a one-time adjustment, there is no reason to raise interest rates at the end of the month.