Food prices are finally starting to go down – will it last?

Food prices in Israel have finally started declining in recent years, but certain events last week have Israelis questioning if this trend will continue.

Last Thursday evening, Minister of Finance Moshe Kahlon and his team held a meeting on the cost of living in Israel, focusing specifically on high food prices. This meeting came only a few days after the Knesset Finance Committee supported Tnuva’s request to raise the price of supervised dairy products, which Kahlon has thus far refrained from approving.

It is well known that Israel’s cost of living is very high in comparison to other developed countries. Research that we recently conducted at the Taub Center shows that there has been some improvement: over the past decade, prices in Israel have been dropping relative to those in the OECD which, combined with rising consumption levels and wages, has resulted in an increase in Israel’s standard of living. However, though the gap with the OECD has shrunk over the past few years, prices in Israel remain relatively high — higher than in almost all other OECD countries.

Food prices contribute greatly to the high cost of living in Israel. Though food prices increased worldwide in 2008, prices in Israel rose and then did not fall back to their original levels as happened in other developed countries. As a result, despite falling slightly in the past few years, food prices in Israel remain quite high both relative to other developed countries and to previous decades. In contrast, there have been substantial price cuts in other industries in Israel, particularly those exposed to competition from imports in the 1990s – such as the clothing and home furnishings industries.

Even within the food industry, some food categories are more open to imports than others. Past Taub Center research has shown a correlation between food categories that account for a large percentage of total food expenditure in Israel (including dairy products) and low import rates. In other words, the food categories that tend to be most purchased in Israel are also those that are primarily produced locally. With a low level of competition from foreign markets, prices for these goods are likely higher than they would be with higher import rates.

In some markets local producers are protected from competition from abroad through a number of different mechanisms including high tariffs, anti-dumping legislation and non-tariff barriers (such as requiring very specific standards for production).

Coming out of the meeting on Thursday, Kahlon says that he and the Finance Ministry will fight an increase in prices through all methods available to them, including re-examining the entire supply chain, aggressively opening the Israeli market to competition, increasing tariff reduction, opening duty-free quotas, encouraging small producers, and removing barriers to imports.

Gilad Brand, a Taub Center researcher who has been studying Israel’s cost of living for a number of years now, suggests that “Israel can follow the example of other developed countries that have chosen to support local agriculture through subsidies, rather than by closing the market to foreign imports.”

Brand further explains that, “in a small country like Israel, opening the market to imports not only increases competition and drives down prices, but also expands the variety of products available in the market.”

This suggestion could offer more choices and lower prices to Israeli consumers while, at the same time, subsidies could give a leg up to Israeli producers.