Who’s to blame for Israel’s inflation?

The public reacted angrily to the sharp rise in prices published this week, which affected all branches of the economy: Housing prices soared, food prices went up, clothing is more expensive, as is transportation and international travel. Blow after blow.

It’s a sensitive issue. Inflation is a scary thing. Wages are not linked to price increases and when our salaries are eroded, we can no longer afford the necessities we are used to. After all, most of us aren’t protected by strong unions that can demand higher compensation on our behalf.

Why has the public outcry been so strong? After all, in Israel inflation has reached a rate of just 4 percent (based on the past 12 months), while inflation in Europe (7 percent) and the United States (8 percent) is much higher.

The answer is that the base prices we pay are 25 percent (!) higher than in the West. In other words, we were already paying a lot more before the recent price increases, and an additional 4 percent on top of that is a lot more painful than an 8 percent increase in the U.S..

The criticism is also partially political. The pro-Bibi camp has used high inflation to undermine the stability of the government. An attack campaign has been launched claiming that the government has failed, and Bennett is to blame because he is bound to the Shura Council and Ahmad Tibi.

But is Bennett really to blame? Herod, the previous finance minister otherwise known as Israel Katz, says unabashedly: “We left a soaring economy, and they destroyed it all.” A soaring economy? A more accurate description would be a crumbling economy.

Herod’s economy was left without a budget, without reforms, with a huge deficit, terrible unemployment, and dangerous levels of debt.

• The year Israel defied all the economists’ expectations
• Israel’s 2021 economic growth rate was the highest in two decades
• Israel’s housing prices are going through the roof. Many investors are prepared to take a risky gamble

Netanyahu was quick to point the finger: “Bennett is raising the cost of living.” But the truth looks different. We are suffering from important inflation – inflation of costs. It began in 2021, when the cost of maritime shipping rose by 800 percent (!) due to the pandemic, lockdowns, and the long queues at the ports. When the world began to exit the pandemic, demand was high, leading to a sharp increase in the price of raw materials: Steel, aluminum, paper, plastic, oils and rice. And then, three months ago, Russia invaded Ukraine, which increased the price of oil, natural gas, wheat, corn and barley. If that wasn’t enough, China is currently facing another outbreak of the coronavirus which has led to lockdowns in Shanghai and further price hikes.

In other words, Bennett isn’t to blame.

There is another reason for the inflation: The sharp rise of money in circulation during the pandemic period. For a year and a half, Netanyahu and Herod unnecessarily poured tens of billions of shekels into the economy, leading to a huge budget deficit and a sharp increase in the quantity of money in circulation. The Bank of Israel preferred to maintain zero interest and did not reabsorb these billions, enabling inflation to raise its ugly head.

It’s also important to note that Netanyahu is to blame for the main problem – the high base level of prices, which, as we said, is 25 percent higher than in the West.

During Netanyahu’s 12 years in power, he did almost nothing to reduce this dramatic gap. He didn’t promote competition. He didn’t cancel import duties. He left us with a high wall of customs on fruit and vegetables, dairy products, meat, chicken, eggs, fish, olive oil, honey, nuts and preserves. He left behind an economy full of monopolies and exclusive importers. He didn’t deal with the bureaucratic obstacles or the Israel Standards Institute, both of which block competition over imports. The result is inflated prices compared to the West.

Unlike Netanyahu, Lieberman and Bennett have begun dealing with these sensitive issues – which is no easy task. They are being supported by the neo-socialists within the coalition, Labor and Meretz. With partners like that, who needs Likud?