After three years of price stability, inflation has raised its head again, soaring by 3.9% in the first four months of this year - a rate substantially higher than the government target for 2002 of 2-3% for the entire year.
The wholesale price index rose by 2% in April, indicating there are more price hikes in the the pipeline. In addition, prices are up this month for gasoline, electricity and telephones. The government is also planning to increase value added tax by 1% starting in June and to impose additional taxes on labor, all of which will have a direct impact on inflation.
To add to these woes, the economy appears to be sinking ever deeper into recession. According to figures of the Labor and Social Affairs Ministry, the number of jobseekers rose in April, and data from the Central Bureau of Statistics gives further evidence that unemployment is rising.
The first and most obvious reason for the price rises is the steep devaluation of the shekel since the government's economic plan was unveiled in December 2001, entailing a budget cut of NIS 6 billion and a reduction of 2% in the key interest rate. In a state where exports account for 50% of production, and where all natural resources and most private consumer goods are imported, a rise in the dollar against the shekel must bring in its wake higher costs for imports and production, leading inevitably to a certain rise in prices.
The treasury is trying to blame the Bank of Israel for the devaluation of the shekel as a result of the central bank's decision to lower the key interest rate by 2% at the end of December. This is a ridiculous, groundless accusation. The public made its adjustments to the new interest rates way back in December, but since then the economy has worsened considerably, from a microeconomic and security point of view, and this is the reason for the continuation of the devaluation and the rise in prices this year.
The public understands that when the budget deficit is so big and deep, there is a danger of an outbreak of inflation and a worsening of the balance of payments. The public fears a continuing recession which will lead to even further reduction in revenues from taxes and subsequently to an even deeper budget deficit, which will prompt the government to impose even higher taxes. Furthermore, the public is highly concerned with the security-diplomatic situation and worried over the prospects of renewed war in the territories, which could prompt another round of cuts and price rises. As a result, many people are willing to buy products at high prices today, for fear that tomorrow prices will only be higher still. In this matter, the uncertainty and expectations of inflation become a self-fulfilling prophecy, and inflation does, indeed, rise.
It is clear that in such a situation, the governor of the Bank of Israel will raise the key interest rate. The situation requires this now and it is also an easy step to execute. But the most important thing is the budget.
This week, the treasury is presenting its austerity budget plan for NIS 13 billion in cuts to the Knesset. It is appropriate to level criticism at the program, which calls for too many taxes and leaves too big a deficit, while trimming too little off government spending.
But when a house is threatened with a blaze, it is not the time to start investigating the quality of service provided by the fire department. Therefore, the Knesset should accept the plan this week. Otherwise, the responsibility for continued inflation and deepening recession and unemployment will fall squarely on the shoulders of the members of the Knesset.