Analysts see pay rises pushing inflation higher

The Governor of the Bank of Israel, Amir Yaron, came to the Knesset Financing Committee session on Tuesday, and made somewhat encouraging expectations of inflation in 2025. It rises by 0.5 % in January, due to the high tax rates, but moderate later in the year and reaches only 2.1 % in August, in the middle of the target range of 1-3 % of the Israeli bank. According to the Central Bank Research Department, inflation will be 2.6 % in 2025, as it decreased to 2.3 % in 2026.

Are these predictions very optimistic? A quick look at the labor market in Israel over the past two months can indicate that it is. Even a few months ago, analysts were divided into the impact of the narrow labor market on the high prices in Israel, and the Bank of Israel was not concerned about the pressure of wages that might feed inflation. At the time of the last interest rate decision, Yaron said: “The supply restrictions in the labor market continue to hinder economic activity,” but he did not warn against jumping in wages.

Reduce unemployment

At the Knesset Finance Committee session, Yaron said that the real wages were higher than it was before the war, but they were “less than a long -term direction.” But given the unemployment numbers and demand for workers, fear grows from the pressure of wages that will feed inflation and cause problems in the plans of the Bank of Israel. According to the numbers of the Central Bureau of Statistics, wages increased by 6 % in the first nine months of 2024, after increasing more than 10 % in 2023.

The narrow scale of unemployment in Israel, which examines the number of people outside of work, was only 119,000 at the end of 2024 (2.6 % of unemployment). At the beginning of the war, the IDF formulated about 300,000 reserve soldiers, a number that gradually decreased. Today, the broader scale of unemployment, which includes the unemployed, people with unpaid leave, and backup soldiers, is only 137,000 (3 %). At the beginning of the war, the number was approximately 400,000, or 8.5 %.

The entire recruitment mode may seem perfect: people work and consume, the economy is working, and definitely an encouraging image in wartime. On the other hand, though, the low unemployment rate enables workers, causing ascending pressure on wages. The high wages tend to inflation: more money in the hands of people means increasing demand, increasing consumption, and high prices.

The low unemployment rate is accompanied by a somewhat demand for workers. The number of vacancies from jobs is 10 % more than average in the previous year of war. Therefore, initial expectations indicate that wages will rise by about 6 % in 2025.

Ravi Joslan, chief economist in the IBI Investment Council, says the labor market continues to heat. He says: “A high percentage between the number of vacancies and the wide unemployment indicates that there is a particularly narrow labor market. These numbers were seen last time during the year 2022.” “This position highlights the importance of dealing with supply restrictions, which will affect the growth environment, wages and inflation.” Gozlan estimates that any improvement will only be gradual, and thus “the current labor market leads to more wages and a rapid rise in inflation.”

In Meitav, the evaluation is that the lack of workers in jobs that do not require an academic degree, while the number that people who have such a condition actually search are in a height. According to Meitav, “The percentage between the number of people looking for work and the number of vacancies in the economy as a whole has decreased from 2.3 in 2022 to 2.1 today, but between people in professions that require a certificate, the ratio increased from 1.9 to 3.7.”

Promotion

Besides the low unemployment rate, the governor of the Bank of Israel in the Knesset indicated additional pressure on the wages that appear later. Yaron cited a decrease in work productivity in Israel compared to developed countries, which arise from gaps in basic skills and decrease in public capital.

“Education is the best starting point for people to advance in this regard,” Yaron said. If the government deals with the problem, workers who have low levels of skills will also be upgraded, which should also mean higher salaries. Yaron also mentioned the decrease in the recruitment rate among Haridi men (48 %) and Arab women (42.8 %). The expansion of the workforce between these population will reduce the pressure on wages for employers.

It was published by Globes, Israel Business News – En.globes.co.il – on January 29, 2025.

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