Israel's Cost of Living Is Highest Among OECD Countries
Israel's price levels were 38 percent higher than the OECD average in 2022, but the damning numbers are part of a trend that began in 2009
According to figures published last week by the Organization for Economic Cooperation and Development (OECD), Israel topped the organization’s cost of living index for 2022. The figures may represent a year in which the Bennett-Lapid government was in power, but they are also part of a long-term trend.
The index compares cost of living with purchasing power in each member state. According to the index, price levels in Israel were 38 percent higher than the OECD average. In comparison with tourist destinations popular among Israelis, such as Greece, Portugal and Turkey, the gap is even greater, reaching, and sometimes exceeding, 60 percent. The price differentials perhaps explain why 5.75 million Israelis traveled overseas between January and July, while only 2.24 million tourists came to Israel.
The cost of living began to sharply rise in Israel in 2009, when price levels were still similar to other OECD countries. That year, Netanyahu was elected to his second term in office, after his first term in the 1990s.
There are several factors behind the dramatic increase in prices since then, among them the highly centralized Israeli economy, particularly in sectors such as food and agriculture, government services and a range of others, such as hotels and restaurants. And due to the many exclusive importers, imported goods are also expensive in Israel.
Another factor has been the strength of the shekel, even though this was caused by positive developments – namely the massive influx of foreign investments into the country.
The soaring cost of living led to social protests in 2011. This begot the establishment of the Trajtenberg Committee, which made a number of recommendations to reduce the cost of living. Some of these recommendations were implemented. For example, credit card companies were split from the banks, digital banking took hold and it became easier to switch banks in the banking sector; restrictions were eased to get small suppliers' products into major supermarket chains and the bigger conglomerates' influence was curbed in the food industry. Import duties and customs costs were also reduced. But none of these measures led to a major shift, and Israel continued to climb up the cost-of-living rankings.
The hardest hit
Over the past year-and-a-half, Israelis have had to deal not only with the ever-increasing cost of living, but have also taken another blow, as rising Bank of Israel interest rates have translated into higher mortgage payments. Underprivileged Israelis, who spend most of their income on private consumption, have been hit the hardest. The upper deciles can compensate by making purchases overseas – an option that is not accessible for the lower deciles.
According to a December 2022 report from the Knesset research committee, Israel is particularly expensive when it comes to the most basic consumer goods. Milk, cheese and eggs, for example, cost some 70 percent more than the OECD average; bread and cereals 54 percent; soft drinks 49 percent; meat 43 percent and health services 31 percent. In fact, the only thing where Israel is cheaper on international comparisons is communications services. This is not at all surprising, as the communications industry is the only sector in which the government dared to make a major reform to introduce competition.
Even in housing, in which the government could take drastic steps as most land is state owned, it has not managed to reduce prices. We have seen prices fall in the past months, but this has been the result of interest rate hikes and higher mortgage payments. Renters are also paying the price of the failed handling of the housing market, with rents rising sharply.
The shocking cost of living raises questions about why the public has remained silent – particularly the weaker segments of society. In many countries, the sharp price hikes of the past two years have led to heated protests, but in Israel, the crisis has not brought the public into the streets.
There are two possible explanations for this. One is that the public focus has been on the judicial overhaul, and the protest movement has been seen by many as the establishment versus the government. The lower classes, among whom support for the government is high, have therefore not joined in attempts to pressure it.
A second possible explanation is the measures that the government has promoted to compensate its constituents – such as handing out food vouchers, shuffling the national priorities, increasing the benefits allocated to the ultra-Orthodox population and benefits for residents of Judea and Samaria – have quelled the masses.
However, moving forward with the judicial overhaul has exacted a price in the form of the weakening of the shekel, which in turn has led to price increases for imported goods and increased inflation. According to the research by the Bank of Israel, a 10 percent devaluation in the shekel leads to a 1.5 percent rise in inflation. Since the establishment of the government, the shekel has devalued by 11 percent against the dollar, which hit 3.8 shekels to the dollar on Friday.
The exchange rate can change Israel’s ranking as the most expensive country in the OECD, but all calculations show that Israel is a horrifically expensive nation, and one that has not managed to make the fundamental changes in its economy that it needs, and suffices with compensating the government's constituent communities.