The difference between macro/micro inflation during the war in Israel

• Published date: 19 April 2024
• Author: NATHAN KLABIN/THE MEDIA LINE
• Publication title: Jerusalem Post, The: Web Edition Articles (Israel)

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The annual inflation rate climbed to 2.7% in March from 2.5% in February, surpassing experts' expectations.

The Media Line contacted Ayal Kimhi, a Professor at the Hebrew University and Vice President of the Shoresh Institution for Socioeconomic Research, to understand what the new economic data means.

According to him, the inflation of 2.7% "is just a bit higher than expected. On the one hand, it is good because it indicates the economy is active, but on the other hand, it is a reversal of a trend, which means that the Bank of Israel has to stay alert. It also justifies the decision of the Bank not to lower interest rates last month."

A rise in housing prices is a sign of concern

"An especially concerning sign is the rise in housing prices," he continued. "The construction sector went almost dormant since October 7th because it relied on Palestinian workers.

Some people who lost their homes in the attack are looking to live elsewhere, adding to the demand. A housing price boom could bring the Israeli economy to disarray."

In the long term, there are macroeconomic challenges, according to Kimhi. "Israel's defense expenditures jumped considerably and will have to stay like that for the foreseeable future. The direct cost of caring for refugees and rebuilding their communities is another considerable expenditure."

"The indirect cost of lost working days and business activity is also substantial. Despite the Israeli government approving a budget that tries to stay within reasonable limits of deficit, unfortunately, they failed to divert unproductive expenditures to more urgent and growth-promoting needs for political reasons.

Investments in the high-tech sector decline

"The high-tech sector is Israel's major growth engine. Investments in high-tech have declined dramatically since the beginning of 2023 due to the government's plan to limit the judicial system's independence, and they have continued to decline due to the war.

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Israel has become riskier for international investors; some take their money elsewhere. This seriously threatens future economic growth," concluded Professor Kimhi.

While general inflation impacts the whole economy, specific government-controlled products are also getting more expensive in Israel, starting on May 1st.

Among the items getting more expensive are a one-liter bag of 3% milk from NIS 5.94 to NIS 6.21, sour cream in a 200ml container from NIS 2.63 to NIS...