The Bank of Israel, like the US Federal Reserve, believes that high inflation in the Western world is circumstantial and temporary. On Monday, the consumer price index for October was 0.1%, and in fact completed a 2.6% increase per year. This is a relatively good figure for the world. Shaken by an annual increase in the consumer price index, which stands at 6.2% - the highest in the last 31 years.
In Europe, inflation stands at 4.1%, but inflation expectations for the coming months point to continued price increases there.
The Bank of Israel explained that some of the price increases are due to the jump in energy prices and partly due to problems in the supply chain - problems that can be considered temporary.
The shortage of central bank employees is also defined as a temporary problem stemming from the corona crisis.
However, it is difficult to hide the fact that the US administration encourages the central bank to continue with the minimalist interest rate policy and the expansion policy in general. .
In the US, low interest rates serve to weaken the dollar, which, along with printing money there, contributes to reducing US debt.
In Israel, the belief in "temporary inflation" provides a good reason to maintain a low interest rate environment.
On the way to political chaos?
We know from our lives the beliefs that are meant to serve our comfort, even though they are not always in line with reality.
For years, China's central bank has artificially set interest rates and a clear exchange rate for any sane person who did not match reality. But the low exchange rate and low interest rates served well a more important task of the government there - creating the highest growth in the world. The Western world has sharply criticized, and rightly so, the economic policies of China, which has played in the free market in its own rules, like a football player who decides his, exceptionally, is allowed to play with his hands as well.
But now the Western world is behaving similarly when it decides, quite artificially, to keep the price of money at a zero level, even though the rest of the market prices are soaring abnormally. After all, the consumer price index is published every month, as is the interest rate. Logic says that temporary inflation - which has been going on for at least a year - justifies a temporary rise in interest rates. This is exactly why the interest rate decision is also made on a monthly basis.
Anyway, what's temporary? Energy prices have skyrocketed by more than 130% for an entire year. Is this a temporary change? After all, according to market expectations, prices should continue to rise in the coming months.
Dr. Gil Befman, chief economist of Bank Leumi, and economist Benyahu Bolotin of Leumi Capital Markets, expect a continued rise in oil prices. In a review published this week, they write that High oil prices and may even lead to further increases, especially if supply does not increase accordingly by OPEC +, or the US.
"The possibility that the U.S. government will restrict oil exports and distillates also exists. However, such a move could hurt the incentives of U.S. oil producers, so that eventually U.S. oil production may shrink and supply in the market decrease." "In addition, this move could provoke a backlash from other countries, which could lead to a trade war, with an emphasis on countries that are oil importers, and increase international tensions due to high global demand for oil." Because the administration there will not restrict oil exports. Why? Because the US administration estimates that the energy crisis is "temporary". And of course, even in this case, the administration should believe that this is a temporary crisis, because restricting oil exports will lead to political chaos and jeopardize the infrastructure plan that President Biden is striving to pass.
Many data support the fact that the changes in the global market are not so temporary: in August there was an unusual wave of 4.3 million workers in the United States who resigned from their jobs, and a total of about 30 million Americans resigned in the past year. Is this a temporary matter? And if so, how will it be resolved? A similar trend is observed in Israel and Europe as well. At the same time, the unemployment rate fell to 7%. A similar trend is also observed in Europe, and again, central banks see it as "temporary". However, it is clear that this is a structural change in the employment market, which leads to a high demand for workers in many industries and a rise in the cost of labor accordingly.
Along with the consumer price index, the price index of "Manufacturing output for domestic destinations" was also published, which jumped in October much more than the consumer price index - by 0.8%.
Since the beginning of the year, this index has jumped by 11.2%.
Of course, refined petroleum products, which are included in this index, jumped by 7% in October, and clothing products, for example, rose by 6.5%.
These increases indicate price increases that will be passed on to consumers in the future.
The artificial price
Although the increases in housing prices are not part of the consumer price index, in a normal situation they would be a good reason for the Bank of Israel to raise interest rates. The CBS publication shows that in the past year housing prices have jumped by 9.9% in the last month compared to the same period last year. It is clear that raising interest rates would have contributed to the cooling of this boiling market, and these price increases can certainly no longer be defined as "temporary".
So true, growth is definitely the most important target, but it is worth understanding that the market pays and will pay heavy prices for this deliberate distortion in the form of low interest rates, because the price is artificial, not real.
In the 1980s, the economist Prof. Milton Friedman proposed expropriating the interest rate decision mechanism from the central bank and determining in advance a kind of linkage of the interest rate to inflation.
So it's about 3% a year.
It makes a lot of sense that the price of money would go up as much as the rate of price increases in the market, and many economists have connected to the idea that it is primarily designed to prevent speculative behavior of the market.
Economists, like elected officials and policymakers, are unanimous about the importance of stability and certainty in the market, and such a mechanism would have contributed greatly to it.
But these days one can think of another great reason for the benefit of this idea: to prevent speculative behavior of central banks.