Israeli price rises prompt strike threat

BBC News
16 July, 2002

Unrest has led to Israel's first recession since 1953

Israeli inflation rose sharply in June, threatening to punch through the government's inflation target for the year.

The country's main trade union federation, Histadrut, demanded that the government raise pay or face a general strike.

But Israeli Finance Minister Silvan Shalom, and many analysts, said the worst price rises could well be over as they were triggered by a soaring US dollar in the spring.

The dollar is now spiralling downwards under the shock of US corporate scandals and profits worries.

Out of control?

Prices rose by 1.3% in June, bringing the total rise from the start of the year to 6.6% - more than double the government's target of 2-3% for this year, official figures showed.

Israelis have experienced double digit prices rises in rent, fuel, foreign travel and electricity during the first half of this year, although shoes, clothing and vegetables fell slightly in price.

Prices of imported electrical goods, in particular, rose because importers' stock ran low while the dollar was high, analysts said.

Anger

The trade unions would be pushing for pay deals of at least 4% to take the edge off inflation, said Histadrut president Amir Peretz.

The government and central bank "have turned the workers into guinea pigs", he said, criticising budget cuts and interest rate rises.

For his part, the finance minister said: "I think the efforts we have made to stabilise the economy will have their effect."

Inflation would stop rising and may even before to fall "which will restore sanity to the Israeli economy", said Mr Shalom.

Economists also said price rises would start to stabilise in July.

"It's a delayed reaction to the shekel's depreciation," said Bank Hapoalim economist Doron Weissbrod.

"Shekel inflation won't go down, but it won't continue going up," he said.

Analysts now expect inflation of about 9% in 2002.

The dollar on Tuesday morning struck its weakest level against the shekel since 25 March, at 4.67 shekels, down 1.2% from Friday.

From boom to bust

Nonetheless, the Israeli economy faces severe problems.

Palestinian-Israeli fighting has caused economic instability across the region.

Until the end of 2000, Israel's economy was thriving, with its hi-tech sector helping to drive growth to more than 6%.

Inflation stayed within bounds, and unemployment was relatively low.

That all changed in 2001, as escalating tensions between Israel and the Palestinians, and the global slowdown, combined to eat into the economy.

The economy shrank last year, for the first time since 1953, and the budget deficit spiralled out of control.

This year, the deficit could reach 5-6% of gross domestic product.