From the cottage cheese and “Milky” chocolate pudding protests to the recent international comparisons of “Pesek Zman” chocolate bar prices, it seems that the price of food in Israel has caught the public’s attention. As such, in last year’s State of the Nation Report 2014, the Taub Center published worrisome findings on price trends in Israel as compared to the OECD. In 2005, most food items were much cheaper in Israel than in the OECD, while by 2011, the picture had reversed itself. For instance, meat and chicken, which were 8 percent cheaper, became an average of 21 percent more expensive in Israel than in the OECD; milk products, which were only 6 percent more expensive, became 51 percent more expensive.
As the analysis of Taub Center researcher Eitan Regev shows in the Picture of the Nation 2015, one of the reasons for the drastic increase in food prices is the structure of the food market in Israel. The food industry is very centralized, and this lack of competition allows manufacturers to charge high prices on many food items.
In addition to little local competition, there is also not much competition in terms of imported foods; the rate of food imports lags far behind imports in other sectors. As the first figure shows, in many of the private import sectors, the import rate increased greatly over the past two decades. For instance, imports of shoes rose from 42 percent in 1996 to 80 percent in 2011, and in the area of cosmetics, imports rose from 35 percent to 58 percent. Overall, expenditure on imported goods in 2011 stood at 70 percent – an increase of 17 percentage points from 1996. In contrast, in the food sector, the import rate was only 15 percent in 2011 – a rate that is remarkably low in relation to other sectors, and which has changed little since 1996.
Exposure to imports brings more competition to local industry and applies pressure to bring prices down and raise efficiency. Likewise, low import rates are likely to allow prices to remain high. The second figure shows the importance of imports in setting prices in various sectors. In sectors where the import rates are high, like furnishings and home goods, prices dropped substantially. The index of food prices, on the other hand, rose during the same period by 53 percent – much more than the rise in the Consumer Price Index which stood at 32 percent.
According to Regev, there are many reasons why the import share in the food sector has remained low, beginning with the requirements of kashrut and health regulations as well as protective tariffs that are intended to protect local industry. As the third figure shows, though, there is no uniformity among import rates in the various food categories. In the main category for food expenditure (meat, milk products, and bread and grains) import rates are very low. In contrast, in those categories where the general expenditure is lower (like fish, sugar and alcoholic beverages), import rates are higher. The significance of this is that in the smaller areas of the food industry, imports are more substantial, while in those areas with greater demand, there is almost no importing taking place. This hints at the possible pressure placed on policy makers by larger interest groups.
Low import rates also seemed to serve an important role in the rapid increase in prices. In light of this, Regev notes that opening the food market is an important step whose time has come which will considerably cheapen expenditure on food, a central component to the high cost of living in Israel. One possibility in this direction is to lower protective tariffs paid by importers; first steps in this area are, in fact, taking place (like opening the market to imported hard cheeses). Nevertheless, to lower food prices significantly, bureaucracy and regulation of imports will have to change even if this step arouses the opposition of powerful interest groups in the marketplace.