Warning bells are ringing in the central bank
The Israeli economy is fast slipping into serious inflation. All the analysts predicted that March's Consumer Price Index would be negative, somewhere in the -0.3% range.
The Israeli economy is fast slipping into serious inflation. All the analysts predicted that March's Consumer Price Index would be negative, somewhere in the -0.3% range. Instead, prices actually rose by 0.3%, surprising everyone.
In April, something similar happened. Forecasts were for inflation in the 0.9% to 1.0% range, but lo and behold, they were off - though by only 50% this time: Prices in April rose 1.5%, a six-year high. So what can we learn from the unexpectedly high inflation of recent months?
First, and least important, Israeli analysts do not know how to measure the CPI. There have been too many wrong forecasts recently.
Second, and much more important, the Israeli economy is rapidly slipping into an inflationary period - and this is very bad news. This inflation is partly imported, but also partly of our own making. Prices for Israeli goods, manufactured or grown, are rising, and have been doing so for almost a year. Every consumer knows this. But on top of this is the increased price of imported goods, and not only food and energy products.
The explanation is economic and simple: The government's annual inflation target for 2008 is in the 1% to 3% range. To keep prices within this narrow range, the governor of the central bank, Stanley Fischer, raises and lowers interest rates. Fischer is one of the world's biggest monetary experts, but the job is not an easy one.
In 2007, Israeli inflation was 3.4% for the year, above the goal. This year, given the 1.5% rise in April, which is half the annual target, it seems very likely Fischer will miss by even more.
This should be setting off inflationary warning bells in the Bank of Israel, and in the Prime Minister's Office - especially if we look at the last 12 months, when inflation rose by no less than 4.7%. Only a miracle could reduce this year's inflation to the target range.
The real question is about next year. Can Fischer keep 2009's inflation under control? The only way he can do so is by raising interest rates now. He will certainly do so at the end of this month. The only question is by how much - half a percentage point or a quarter. Fischer will have to do an about-face and raise them. This will hurt economic growth, and consumers. But when inflation rears its head, there is no choice. And who will suffer the most? Of course, the poorest members of Israeli society, the bottom 20%. They will suffer the highest inflation and receive the least compensation.
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