Analysis

Prices in Israel Rising? Think Again. They've Barely Changed While Wages Have Soared

The shock of increased electricity and water rates belies the overall trends in Israel

An Israeli protester uses loudspeakers to shout slogans during demonstrations against the rising cost of living on December 14, 2018 in Tel Aviv.
JACK GUEZ / AFP

The Yellow Vest protests in Tel Aviv Friday against the high cost of living hadn’t broken up when the Central Bureau of Statistics released its latest inflation report showing that prices fell 0.3% in November.

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Seven years after the social-justice protests, the high cost of living remains a frequent topic of discussion in Israel. “Prices are rising,” scream the headlines, but the reality is that the consumer price index, which reflects how prices are moving, has barely budged in recent years.

Since July 2011, when the protests were underway, the CPI has risen just 3.9%. That's low inflation over an extended period, and many categories of prices have fallen. If the Bank of Israel had managed to keep inflation in the government’s target range (an average of 2% a year), prices would have climbed 15% in the seven years.

But the CPI doesn’t measure the cost of living. It tells you how much prices have changed for a designated basket of goods and services. It doesn’t tell you how high the cost of living in Israel is compared to other countries, or how high prices are compared to incomes.

Cost of living indicators, change since 2007

It also tells you nothing about the future direction of prices, while the latest headlines about price rises talk about increases that are about to come. The big increase in electricity and water rates are due to take effect in January, as are higher prices for dairy products and bread. Their impact will only appear in the January CPI published in February.

Comparing prices in Israel with those abroad tells a different story than the CPI does about the cost of living. The price of the popular dessert Milky costs twice as much in Israel as does the equivalent product in Berlin.

Online shopping has made it easier for Israelis to compare prices, as has the big increase in Israelis taking holidays abroad. This often makes consumers feel they're being ripped off.

But that doesn’t mean the comparison is always fair. That’s especially the case in one-on-one comparisons, which don’t necessarily reflect things like product quality, differing incomes between countries and exchange rates.

To help cope with the problem, economists use purchasing power parity, which looks at the cost to buy a fixed basket of goods and services across different countries. The Organization for Economic Cooperation and Development publishes comparative price levels monthly, based on consumer spending, inflation and exchange-rate changes.

For October, the index shows that a basket of goods that would cost 100 shekels ($26.50) would cost 97 shekels in Australia, 84 in Austria, 54 in the Czech Republic and just 32 in Turkey. Only four OECD countries have higher prices by that measure than Israel – Switzerland and Iceland, both at 118 shekels, Norway at 108 and Denmark at 109.

Exchange rates distort these comparisons; for example, with Turkey, where the lira has collapsed. Moreover, prices among countries vary by product and service. Thus in 2014 OECD figures showed Israel 22% more expensive on average, but some items like apparel and fresh produce were lower in Israel than the OECD average.

Also, people are bad at estimating their income and outgoings. When the prices of high-profile products and services go up and the media covers it, people tend to perceive it as if all prices were going up.

Average Israelis are attuned to every change in the price of cottage cheese but not to the price of the table they're eating it on. The price of furniture in Israel has plummeted in recent years, but the modest increase in the prices of dairy products has received far more attention.

The ability of households to spend isn’t just a matter of prices but also of income, and here the picture is quite clear. There are many ways of calculating household income, but by most of them Israel’s is low by developed-country standards – below that of Western Europe, Scandinavia and North America.

The good news is that Israeli incomes are rising quickly. Household cash income (before taxes) rose 4.5% in 2017, the median wage for salaried earners last year rose at its fastest pace in 15 years or more, and the minimum wage was lifted twice in 2017 at a time when more Israelis than ever are in the workforce. In fact, pay is rising much faster than consumer prices.