Recently, there has been a lively public discussion surrounding the cost of living in Israel, and it is frequently claimed that the prices of consumer products are higher in Israel than abroad. Studies find partial evidence that compared to other developed countries, the price level of private consumption in Israel is relatively high considering that income per capita in Israel is relatively low. The findings in such international comparisons, however, are obfuscated by the influence of fluctuations in currency exchange rates, an issue not addressed properly in earlier studies. In this chapter, this issue is examined by conducting an international comparison of price rates over 25 years. This long-term comparison serves as a test to assess whether the high price level observed in recent years is temporary and can be explained by, for instance, the appreciation of the shekel in 2008, or whether it is a long-term process associated with structural facets of the economy. The study finds that fluctuations in the nominal exchange rate cannot account for the high price levels found in earlier studies and that high prices are a long-term phenomenon which are likely related to structural factors in the local market.
In addition, the chapter examines the price changes in the various consumption categories, focusing on the food industry where there was a rapid rise in prices concurrent with an increase in profits during the second half of the last decade. These findings indicate the importance of continuing to expose the economy to imported goods as a means of increasing competition, reducing prices and improving consumer welfare in Israel.
This paper appears as a chapter in the Center’s annual publication, State of the Nation Report 2015, Dov Chernichovsky and Avi Weiss (editors).