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Houthis are coming: maritime terrorism is already raising prices - voila! money

2023-12-08T06:38:29.536Z

Highlights: Houthi threat to shipping routes to Israel joins the other drivers of inflation. This threat may be international, but when you look at rising prices, you find that the government also has a responsibility. The disruption of international sea routes harms and will harm not only Israel but also the countries of the eastern Mediterranean basin, especially Egypt, whose budget is funded by shipping levies on the Suez Canal. The price of tradable goods and services are increasing at a slower rate than nontradable goods or services.


The Houthi threat to shipping routes to Israel joins the other drivers of inflation. This threat may be international, but when you look at rising prices, you find that the government also has a responsibility


The Galaxy Leader, which the Houthis took over in the Red Sea. An International Problem with Implications for the Israeli Economy/Reuters

Here's a concern about inflation, this time from an unexpected source. The real threat posed by the Houthi rebels in Yemen to the State of Israel and the Israeli economy is not only from a direct hit by an Iranian-funded missile at Eilat, but also from the threat of closing a vital shipping route to Israel.

Since the IDF can launch missiles, the real threat these days is the blocking of the movement of trade ships and oil tankers in international waters in the Bab el-Mandeb Strait. Ships with ties to Israel conduct a practice of neutralizing international signaling systems when they pass through the strait, at the southern end of the Red Sea, in order to avoid detection and due to fear of being taken over or harmed by pirates (Houthis or Somalis), but to no avail.

In effect, the Houthis are damaging one of the world's trade arteries, through which 6.2 million barrels of oil a day and 10% of world trade pass. The disruption of international sea routes harms and will harm not only Israel but also the countries of the eastern Mediterranean basin, especially Egypt, whose budget is funded by shipping levies on the Suez Canal.
In the background, we should only note that Egypt is currently suffering from tremendous poverty and a shortage of foreign currency.

The disruptions led to a 12% increase in freight rates from China to the Mediterranean over the past week. The relocation of shipping lines of shipping companies in an Israeli context or foreign shipping companies in operation for Israel or in any combination of companies registered in convenience zones leads to a significant increase in the cost of sea transportation of goods such as vehicles, for example, from Southeast Asia – and mainly from China – to Israeli ports. Oil tanker lines to the eastern basin of the Mediterranean were also damaged. The result: imposing increases in sea freight rates on the consumer in Israel.

Naturally, the marine insurance rates that shipping companies pay on risky lines are also rising these days, so that the result is an effective increase in import prices from Southeast Asia for importers, and from there a short way to increase inflationary pressures and harm the Bank of Israel and the government's efforts to curb inflation.

Car at Eilat port. Will we pay more for new cars because of the Houthis?/Kobi Liani

TV and recreation

It should be noted that in recent months, and in the past year, the import component to Israel has been a tool to curb inflation, and was not sufficient for the overall increase in the Consumer Price Index. Prices of tradable goods and services are increasing at a slower rate than nontradable goods and services.

Tradable goods and services are characterized by competition between international firms or importers to Israel, such as from Southeast Asia via the Red Sea in Ashdod, Haifa and Eilat, against local goods and services. For example, it is possible to enumerate in durable marketable goods; Tables, furniture, electrical kitchen equipment and electrical entertainment equipment such as TV as well as computers, screens and vehicles. Also in the category of marketable products, we will also find bedding and baby products.

Imports by sea, not necessarily through the Red Sea, also concern cattle, grains and sugar. In services, the main competition is vacation in Israel as opposed to vacation abroad.

Nontradable products are of a local nature and are usually not challenged by imports or competitive consumption from abroad, such as; Electricity consumption, municipal taxes, rent, municipal taxes, water, sewage, renovations, public transportation, restaurants, local food, meals at work, vocational training, dental care, and studies, including vocational training.

According to the Central Bank, tradable goods components with competition from abroad increased by 2.9 percent in the past year, and the prices of nontradable goods, that is, of a rigid domestic nature with little competition between suppliers, increased by a higher rate of 4.2 percent.

The Houthi blockade of the Bab el-Mandeb Strait is liable to lead to higher prices of tradable goods. Let's hope that the blockade will not last long, since America and its allies will eventually have to defeat the Houthis, Iran's proxies, perhaps with Israeli assistance.

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Give gas

A new concern about inflation worldwide and in Israel comes from oil prices. At the moment, oil prices around the world are in retreat, which enabled the Ministry of Finance to raise the excise component at the beginning of the month by 26 agorot per liter of gasoline, without raising gasoline prices. Oil prices in international markets are currently declining because the global economy is retreating at its growth rate, mainly in China and Europe, which are unable to extricate themselves from the slowdown in the growth rate.

In China, this is because of the crisis of the huge construction and development companies, which have run into difficulties and cannot meet their financial obligations. In Europe, due to high energy prices, since Europe, and especially Germany, have cut off cheap Russian oil.

The world now faces an obstacle around the corner: OPEC+ countries, namely OPEC and Russia in particular, have decided to reduce oil production by 2.2 million barrels a day in early 2024, against the background of a decline in demand due to the weakness of global economies and an increase in the use of electric vehicles. Electric vehicles enable the regulation of electricity consumption throughout the day, as opposed to sharp curves of highs and lows as has been the case for years.

OPEC+ countries produce 40% of global oil production, 43 million barrels a day. If they succeed in reducing their output, then energy prices in Israel, including gasoline, will contribute to an increase in the inflation rate.

In the fog of war, the current government is not doing what is necessary to reduce prices under its supervision or in bodies acting on its behalf, such as the Electricity Authority. Coal accounts for about a quarter of electricity production inputs, compared to two-thirds of electricity inputs, which come from natural gas. The rest comes from renewable energies. When the price of coal rose, so did electricity tariffs, and the Treasury even had to reduce the excise tax on coal to prevent too sharp an increase. Now that coal prices are at record lows, coal prices in international markets have fallen by 66% in the past year. Isn't it time to immediately announce a reduction in electricity tariffs in Israel? Even so, households and industry are struggling because of the war.

Is it possible that the reduction in electricity tariffs is not being implemented because of the reduction or shutdown of gas production from gas reservoirs in the Mediterranean Sea due to the war in Gaza? In any case, the Electricity Authority owes the public an account of the tariff structure these days, when the public is groaning under the burden of subsistence due to the ongoing war with Hamas in Gaza.

Just to put it against the backdrop, gas prices in the US have fallen by 55% in the past year and by 68% in Europe.
According to the Electricity Authority, electricity tariffs have fallen by 82% in the past year in Britain, 70% in Germany, 77% in France, 63% in Italy and 63% in Spain. It is true that prices in Europe were high because of the crisis of disconnection from gas sources from Russia, but when a correction is needed in accordance with changes in costs in the markets, tariffs change – and in this case fall. Even if we take into account that the price of the dollar in Israel has risen by about 9% in the past year, an immediate reduction in electricity tariffs is still required.

Another concern is the downward price rigidity. Remember how they justified the increase in bread and development prices and the Shabbat began, because of the rise in wheat prices following Russia's invasion of Ukraine, one of the largest wheat suppliers in the Eastern Mediterranean?

Quietly, without informing the Israeli public, the price of wheat has been dropping steadily over the past year by 24%. From its peak in early May 2022, the price of wheat in international markets has collapsed by 50%. The price returned to the level it was in November 2020, well before the war broke out in Ukraine, on February 24, 2022.

Despite this, we continue to pay exorbitant prices for flour and bread, essential and basic items for many families. Apart from declarations and slogans, the Ministry of Economy and Industry does not act to demand from the government price committee the calculations for setting the price of bread under supervision. The requirement to examine prices should be made today.

In the fog of war, the Antitrust Authority also fell asleep, as it does from time to time. Could she have examined, for example, whether there was an illegal restrictive arrangement between the mafias? The argument is not that there is one, but that it is the duty of the Authority to examine any market that appears to be insufficiently competitive.

The price of pita, which is still 50% more expensive than before Russia's invasion of Ukraine, has an impact on the prices of dining in eateries in Israel, which is a shame. Secretly, we will tell you that the price of corn has fallen by 29% in the past year, maybe you felt it in the prices of cornflakes, or maybe not? The only case in which a price drop can be identified according to international variable prices is the price of canola oil extracted from rapeseed. The price of canola has dropped by 20% in the past year and is already having an impact on the price of canola oil in Israel, mainly due to competition from abroad.

Bank of Israel Governor Prof. Amir Yaron. Won't lower interest rates anytime soon/PR

Bumper cars

Another contribution to inflation will come from vehicles and their maintenance. Purchase tax on electric vehicles is set to rise to 30% in January from 20% today. There may be a change, but surely this increase, if implemented, will lead to an increase in the prices of vehicles in Israel, including internal combustion vehicles and, of course, second-hand vehicles. The Treasury needs revenues to finance the war, so giving up this source does not appear at the moment. The cost of owning a car will also rise because the excise tax on gasoline will continue to rise. This is an important fiscal source for financing the budget.

An important unknown in the consumer price index is the rental price. The rental price index increased by 5.8 percent in the past year before October, the same as the index for September. The war resulted in tens of thousands of refugees within their country, who were gathered from the borders of the State of Israel, which could lead to an increase in rental prices, despite the war.

The one that can moderate the increase in the housing component is the Tenant-Owned Housing Services Index, which entered the CPI calculations for the housing component, an index that slowed its pace of increase to 4.9 percent in the year prior to October, after 5.5 percent annualized for September and 6.1 percent annualized in the year preceding August, all due to the decline in home prices that are not directly measured in the CPI.

Disruptions in the supply of fruits and vegetables in the coming months are due to some farmers abandoning their fields near the borders. This means that Israel's dependence on imports will increase, global sea freight is on the rise, which may prevent abundance that halts price increases.

The Central Bank expects inflation this year to be 3.5 percent, and I believe that it will be less than this rate, mainly due to the recent appreciation of the shekel. The Bank of Israel also expects inflation to decline next year to 2.4 percent, my expectation is that it will be higher, mainly because of the adsorption of the protracted war that will weigh on prices in Israel, from the prices of sea freight and energy to the fear of rising rent prices.

Hence, the Bank of Israel cannot reduce the interest rate in the coming months, as many market predict. Although the Bank of Israel's expectation that the interest rate in one year will decline to 3.75-4%, my expectation is that the interest rate is at the upper end and even higher. In any case, the interest rate in Israel is partly derived from the US Federal Reserve's interest rate, where it is expected that it will decline at the earliest in the second quarter of the year.

Thus, Israel depends on the United States both to thwart Houthi attacks, to an armada of warships, aircraft carriers and submarines in the Mediterranean, the Red Sea, and the Persian Gulf, as well as on enormous military aid, including an airlift of ammunition and equipment, as well as the interest rate set by the Fed during the coming year, which affects monetary policy around the world and also on Israel.

  • More on the subject:
  • Houthis
  • Red Sea
  • inflation

Source: walla

All business articles on 2023-12-08

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