Rising commodity prices and ensuing increases in inflation rates will mark the post-pandemic recovery of many countries around the world, Israeli economists believe.
As vaccination rates surge and the impact of COVID-19 recedes, the prices of gas and basic consumer goods are rapidly increasing, raising fears of accelerating inflation. Global food prices surged by nearly 40% year-on-year in May, the UN’s Food and Agriculture Organization monthly price index revealed.
It’s a global phenomenon. With the opening up of economies and coming out of lockdowns due to the coronavirus we’re seeing a surge in prices that of course is measured as a rising rate of inflation
Prof. Leonardo (Leo) Leiderman is a professor of economics at Tel Aviv University and chief economic adviser at Bank Hapoalim, the largest commercial bank in Israel.
“It’s a global phenomenon,” Leiderman told The Media Line. “With the opening up of economies and coming out of lockdowns due to the coronavirus we’re seeing a surge in prices that of course is measured as a rising rate of inflation.”
According to Leiderman, the inflation is an after-effect of the COVID-19 pandemic, which saw many sectors of the world economy shuttered for months on end as people remain cooped up in their homes.
Against the backdrop of a rising Consumer Price Index (CPI), the chief economist of Israel’s Finance Ministry, Shira Greenberg, on Sunday forecast that inflation rates in the country would be 2.2% in 2021 and 1.5% in 2022. This stands in contrast to an earlier forecast from the Bank of Israel, which predicted an inflation rate of only 1.3% in 2021 and 1.2% in 2022.
In its review, Israel’s Finance Ministry noted that there was a rise in household savings as a result of pandemic restrictions. Now that most of those restrictions have been lifted, however, private consumption is quickly growing and fuelling price increases across the board.
“We expect that these temporary effects will moderate in 2022, alongside the unemployment rate, government aid, and appreciation of the shekel,” the Finance Ministry wrote.
The CPI in the United States, meanwhile, increased by 4.2% from a year earlier.
Leiderman believes that the phenomenon is temporary.
“In the case of Israel, the current market assessment is 2% for the next five years, so I think right now we are not having lots of alarms on central banks to hurry up and raise interest rates and conduct contractionary monetary policy in order to tighten conditions in the economy,” he asserted. “We can say that there is significant inflation uncertainty, so the degree of confidence that we as economists have in any forecasts has diminished. On the other hand, we have to put things into proportion.”
Other economists were less optimistic and cautioned that rising inflation rates could spell trouble for Israel’s booming housing market.
Dr. Alex Coman, an economic specialist at the Adelson School of Entrepreneurship at Israel’s Interdisciplinary Center Herzliya, told The Media Line that it could have a significant negative impact on mortgages.
“Many Israelis have taken mortgages and many of these mortgages are dependent on interest rates so they are dynamic,” Coman said.
Israel’s economy has rapidly recovered on the backdrop of its successful COVID-19 vaccination campaign and its unemployment rate continues to decrease. According to figures released by the Central Bureau of Statistics last week, the jobless rate in the country dropped to 5% as of May, from a peak of 27% seen at the height of the pandemic crisis.
While these numbers are encouraging, “there is a significant proportion of the population who received mortgages because the household had both the husband and wife working, and then suddenly one of them lost their job or were reduced from full-time employment to [part-time] employment,” Coman said.
“Their income is reduced and then they would have to pay higher mortgage [rates] due to inflation,” he added. “That could generate a wave of defaults, which is going to be very, very painful.”
Leiderman, of Bank Hapoalim, does not agree with this assessment. According to him, the Bank of Israel has no plans to raise interest rates or tighten monetary policy as of yet.
“Whether the rate of inflation is 1.5% or 2% is not going to be a major shock to the mortgage market,” Leiderman said. “We’re not speaking of a major inflationary shock.”