Faced with the baffling phenomenon that had yet to be named inflation, Martin Luther scolded the merchants who, he thought, caused it: “It should not be ‘I will sell my wares as dear as I can or please’ but ‘I will sell my wares as dear as I should, or as is right and proper” (“On Trade and Usury,” 1524.)
“It should not be ‘I will sell my wares as dear as I can or please’ but ‘I will sell my wares as dear as I should, or as is right and proper.”Martin Luther
Written at a time when economics had yet to become a science, this statement reflected contemporary impressions that inflation was the devil’s doing. Fortunately, there is nothing so mystical about this scourge, which is fully man-made. Inflation is a shortage of goods combined with a surplus of money. In Luther’s time, there was too much money because of massive silver and gold imports from America.
What is happening now, as prices of just about anything climb globally, is about inflation’s other side – a shortage of goods, due to the disruption of transshipments caused by the pandemic and the Ukraine War.
The alarmism all this has sparked is justified. The hysteria is not.
An indisputable price crisis
THE EXISTENCE of a price crisis cannot be debated.
Inflation in the Eurozone is now 8.6%, in the US and Britain it has crossed 9%, and in Poland and the Czech Republic it is past 15%. Inflation is bad – economically, socially, politically and internationally.
Economically, price instability discourages investors because uncertainty increases their risk. Socially, inflation is a heavy tax on both the middle class and the working class, as their purchasing power declines. And politically, inflation makes angry citizens.
Worst of all, in poor countries, inflation might produce bread riots. This is particularly realistic in the Middle East, where such unrest can spread like wildfire with unpredictable results, the way last decade’s social protests across the Arab world sparked multiple civil wars and a major refugee crisis.
Older Israelis don’t need economists to tell them this. They remember the inflation era that began after the Yom Kippur War, ended with the 1985 austerity plan, and in the interim traumatized the economy with a lost decade.
That is why every reasonably managed country in the world is now waging war on inflation.
The war on inflation: Good news and bad news
The ideal way to fight inflation is to attack it from both its ends: cut money supply and bolster the supply of goods. That’s what Israel did last century, when both sides of its inflation were its own doing, one through excessive spending and printing of money and the other through excessive tariffs and industrial protectionism. Israel thus sharply cut money supply – through deep spending cuts, salary freezes, and spiked interest rates – and at the same time increased imports by cutting tariffs and subsidies.
Under the current circumstances, individual governments can treat inflation’s one side, money supply, but they can’t treat its other side, other countries’ exports, because they can’t stop Russia’s assault on Ukraine.
That’s the bad news. The good news is that the financial side is indeed being tackled. Over the past four months, the American Federal Reserve has raised interest rates in four rapid shots that raised the dollar’s basic borrowing price by two percentage points, to 2.5%.
Other central banks, from Switzerland to Australia and Israel, followed suit. At the same time, something unexpected happened in the war zone.
Russia, Ukraine and the price of grains
A deal brokered by Turkey between Russia and Ukraine created a safe corridor through which stranded Ukrainian grain was released and set sail to clients overseas. The deal is fragile, but it is also visionary and the Turks deserve compliments for conceiving and delivering it.
Between them, the bankers and the diplomats created a pincer movement on inflation, and the results are now visible in the financial markets.
Wheat, which entered the war costing about $7.63 per bushel and with the war’s outbreak nearly doubled to $12.94, plunged following the deal to $7.74, pretty much its prewar level. Similar dynamics were seen in the trading of cotton, corn and other agricultural commodities.
Oil prices, meanwhile, after having soared this year from $76 to $123 per barrel, this week sold for less than $94, reflecting expectations for tempered Western demand, as money becomes more expensive and industrial activity consequently slows.
Does this mean the crisis is over?
It doesn’t. Europe’s boycott of Russian gas still pressures energy prices, and the grain corridor can collapse at any time. This does, however, mean that the inflationary pressures we face are tamable and that some of this drama’s protagonists had better cool down, especially here in Israel.
Israel and inflation: How bad is it and what can we do about it?
ISRAEL’S SITUATION in this global crisis is actually much better than most other countries, with inflation here hardly half its rate in the US and Europe, reflecting a much better budget balance as well as self-sufficiency in gas.
Even so, Israeli inflation has crossed 4%, reflecting rising global prices of both finished goods and raw materials. This doesn’t mean price rises should be accepted fatalistically. When producers, importers and retailers see everyone around them spiking prices, they are prone to lose their sense of measure and assume customers will absorb anything. They shouldn’t.
The public can, and must, revise its purchasing habits. It’s easy for a restaurant to raise its breakfast price from NIS 60 to NIS 80. It’s just as easy for us to look at the menu, get up and go to the joint across the street that offers breakfast for NIS 70. The difference between the two is not NIS 10. It’s the difference between decency and greed.
Bullying is a two-way street, as Histadrut Chairman Arnon Ben-David showed when he threatened three major importers – Diplomat, Kimberley Clark and Schestowitz – with a consumers’ boycott. One of them, Diplomat, has already delayed a round of price adjustments.
Luther may not have understood economics, but he sure was right in warning that making room for greed opens the door to hell.
The writer, a Hartman Institute fellow, is the author of the bestselling Mitzad Ha’ivelet Ha’yehudi (The Jewish March of Folly, Yediot Sefarim, 2019), a revisionist history of the Jewish people’s political leadership.