The Bank of Israel has confirmed today what Israeli consumers have felt for a long time: the cost of living in Israel is high. In an extensive review released today, the central bank compares prices of consumer durables and food in Israel with prices in the OECD countries and in Europe. The conclusion is that prices of these products are higher in Israel than in the rest of the OECD by tens of percentage points in most categories.
For example, cars are 70% more expensive in Israel than the OECD average price. Israelis pay 44% more for milk and eggs, 28% more for meat, 30% more in hotels and restaurants, 42% more for consumer goods, 17% more for fish, 19% more for culture and leisure activities, 48% more for non-alcoholic drinks, 17% more for bread and cereals the list goes on. In fact, Israel is cheaper than the OECD average only in two categories: fresh fruit and vegetables (13% lower); and telecommunications (4% lower).
The OECD data indicate that price levels in Israel for private consumption in 2010 were 20% higher than what would have been expected on the assumption of a direct connection between per capita income and product prices (although the figure is not statistically significant).
In 2008, food prices in Israel were almost 20% higher than would have been expected in a country with per capita income like that of Israel. Taking into account developments in prices, the exchange rate of the shekel against the euro, and developments in GDP per capita in Israel and Europe between 2008 and 2011, the central bank estimates that food prices in Israel continued to become dearer in relation to eurozone countries in the past three years by a further 10%.
The Bank of Israel points out that the fact that in Israel there is no reduced rate of VAT on food products (apart from fresh fruit and vegetables, which are exempt from VAT) probably contributes to the relatively high price of such products here, but says that there are also other factors to do with the structure of the food products market that keep prices high.
Commenting on the milk products market specifically, the Bank of Israel report states: "It seems that milk products are unique for the protection and subsidies they enjoy in the various economies of the OECD. In Israel, import duty on milk and on butter is 150%, and the duty on cheeses is also high. In this respect, the milk market in Israel is closed, and the price of milk products is affected by the structure of the milk market, which is uncompetitive and in which regulation of consumer prices is limited."
The central bank notes that the import duty on fresh meat is also very high, and that the demand for kosher meat products represents a further barrier to competition from imports. The main problem causing high prices of non-alcoholic beverages is a lack of competition in an industry dominated by three large producers, the report says.
Prices of clothing and footwear are not high by international standards, the report finds. "The substantial exposure to imports of these products in Israel and competition in the industry presumably account for the low price of clothing and footwear," it states.
Published by Globes [online], Israel business news - www.globes-online.com - on January 18, 2012
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