Chief economist of the Finance ministry updates upwards the inflation forecast for 2021 to 2.2%

The chief economist of the Ministry of Finance, Shira Greenberg, updates upwards the inflation forecast for 2021, the rate of price increase during 2021 will be 2.2%. "In the coming year we are expected to see an increase in inflation due to the recovery of the economy, an increase in private consumption due in part to an increase in private savings and an increase in energy prices," read its review published today.
In Israel, like other developed countries in the world, inflation expectations have risen since the beginning of the year - expectations derived from the capital market stand at 1.7% over a 10-year period, a figure that reflects a change in expectations compared to recent months but still below the 2% target range.
Due to the decline in morbidity in Israel, restrictions on economic activity were lifted earlier compared to most developed countries. As a result, the chief economist estimates that "the trends that are expected to lead to world price increases will begin earlier in Israel, such as increased consumption due to subdued demand." For example, prices in some leisure and hospitality industries may rise due to the sharp rise in demand.
"It is possible that some of the businesses affected by the closure period will want to raise prices and compensate for the loss of revenues. In addition, the expected price pressures from abroad will continue to affect inflation in Israel and will be reflected in import prices," the review said.
Despite the appreciation of the shekel during 2020 (by about 5%), the increase in world commodity prices is also imported to Israel, as reflected in the items of furniture and household equipment, fuel prices and the input price index in the agriculture industry. "Imported inflation" combined with the strengthening of demand in Israel are expected to support a certain increase in inflation in the short term, it is explained in the review.
In 2022, the Ministry of Finance predicts that the temporary effects will moderate alongside unemployment rates, government assistance and the appreciation of the shekel, and during 2022 the inflation rate will be 1.5%.
Greenberg estimates that one of the most significant factors in raising inflation expectations in the short term in Israel and around the world is the significant increase in household savings in 2020 in light of the limitations that reduced spending opportunities, economic assistance to households and businesses and uncertainty about future income. With the removal of restrictions and the reduction of uncertainty, private consumption is growing rapidly, causing prices to rise.
Another reason for the rise in inflation expectations in the short term is a rise in the transportation costs of goods. Also, since the height of the crisis and against the background of the recovery in the Chinese economy, there has been a rise in prices in most types of commodities with one reason for this being investments in commodities as a possible hedge against inflation. In addition, oil prices have risen in the face of an initiated reduction in production and a gradual increase in demand.
Another aspect to which the chief economist refers in her review is the rapid recovery in the stock market. Greenberg warns that global warming and global inflation could at some point cause interest rates to rise, which could hurt investors in the stock market.
However, the review noted that this is not the central scenario, but a pessimistic scenario with a lower probability.
"Compared to previous crises, the rapid recovery in the stock market, the relatively moderate decline that preceded it, and the high value of companies traded on stock exchanges (especially technology companies) are based in part on the expectation that interest rates will remain low over time. "Commonly, a steep rise in yields, if they occur, could hurt the valuations of technology companies and the confidence of investors in growth companies," it said.