BoI Justifies the Protesters: Consumer Prices in Israel Are Higher Than in OECD

Israeli food prices in 2008 were 15% higher than the average among countries in the Organization for Economic Cooperation and Development, which Israel joined last year, says the report.

It's official: Product prices in Israel have risen in recent years by more than the increase in manufacturing costs, the Bank of Israel said on Wednesday, confirming what Israeli shoppers have suspected - they're paying through the nose, and more so than ever before. Moreover, many product prices are higher in Israel than in the OECD, the central bank report reveals.

A central bank report published on Wednesday reveals that not only are many product prices in Israel higher - sometimes by tens of percent - than in other developed nations with similar per-capita income, the gap has also widened in the last three years.

Super-Sol Protest - Hagay Frid - 19012012
Hagay Frid

Israeli food prices in 2008 were 15% higher than the average among countries in the Organization for Economic Cooperation and Development, which Israel joined last year, says the report. Compared with countries whose gross domestic product per capita is about the same as Israel's, prices here were about 20% higher in 2008.

From 2008 to 2011, the price gaps between Israel and the European nations have widened, by about 10%, say industry insiders.

The level of pricing in each country is usually correlated with income per capita. The more people earn, the more they can spend and the more manufacturers can charge. But in 2009, the Bank of Israel wrote, price levels of consumer products in Israel were 15% higher than they should have been according to the income-per-capita test.

Moreover, in 2010, consumer prices in Israel were higher than in the other OECD nations, says the report. The gaps seem even wider when one considers that income per capita is lower in Israel than the OECD average.

Why? Blame the absence of competition in the Israeli market regarding certain products, says the Bank of Israel. Another reason is that value added tax on food in Israel is relatively high, the central bank adds.

When it applies at all, value added tax in Israel is a flat 16%. The United Kingdom, for instance, has a standard rate of 20%, but there are plenty of exceptions to the rule - the usual reduced rate there is 5%, and no VAT applies to food and drink for human consumption, for example. So, one reason food prices in Israel are higher than in many other comparable nations is that VAT is applied, and import taxes are high.\

Dairy costs 44% more

In identifying VAT on food as a culprit, the central bank is opening up a front against the Finance Ministry, which is adamant about keeping the tax - including on food staples, drugs and transportation - unchanged.

That said, why did prices rise so sharply in Israel from 2008, compared with the rest of the countries in the OECD (to which Israel didn't belong at the start of this period )? Because of feeble competition, says the central bank.

Israeli shoppers have long suspected that one of the worst offenders against proportional pricing is the dairy industry - and the Bank of Israel reports confirms it.

In 2008, Israeli dairy and fish prices were 30% higher than in countries with similar income per capita. And when compared with the OECD average, dairy prices here were 44% higher in 2008, the report says.

Many developed nations subsidize dairy products, which lowers their cost to consumers, points out the report. But another reason for the high level of prices here is import tax of 150% on butter and milk, which effectively rules out competition by imports. Locally the dairy market is not marked by competition, and there is little control over prices.

The same applies to fish - import tax is high and competition is scanty. There is only one big importer and two local suppliers. Nor is the fresh-meat market subject to competition - import tax on fresh beef and poultry is high enough to constitute a barrier, says the central bank.

Especially wide gaps were also found in prices of cars, which cost 70% more here on average than in the OECD nations. Nonalcoholic beverages cost 48% more in Israel, and hotel and restaurant prices were about 30% higher here than in the OECD countries in 2008. The Bank of Israel report says feeble competition is the reason nonalcoholic drinks in Israel cost so much relative to OECD nations. There are just three big manufacturers, the central bank points out.

But it doesn't end there. Yet another barrier to imports is the insistence on kashrut. The big retail chains won't touch products that aren't kosher, which again stifles competition.

If there's an upside for the Israeli shopper, it's that fresh fruit and vegetables are cheaper here than abroad, in part thanks to the employment of foreign workers, the central bank says.

Clothing is competitive

While the price of food is clearly higher, that can't be said of clothing and footwear. Intense exposure to imports, including low-cost imports from China and India, has quite possibly made a mark. The price of apparel and shoes hasn't changed significantly in Israel in the last three years.

But the cost of a stay at an Israeli hotel, and a meal at an Israeli restaurant, has risen, and in 2008 ran about 30% higher than that in OECD countries.

The Industry, Trade and Labor Ministry said in response to the central bank report that it views reducing the cost of living as a key goal. That is why it, together with the Finance Ministry, set up the so-called food committee, which is being headed by the Industry Ministry's own director general, Sharon Kedmi. The committee has announced its interim recommendations, the ministry continued, and legislation will clearly be needed to introduce competition into the food market.

Regulation, legislation and explanations will be forthcoming after the committee releases its final recommendations, the committee said.