Fischer's dilemma

Maintaining the delicate economic equilibrium isn't merely like walking a tightrope, it's like walking an invisible one.

Stn Fischer good 88 248 (photo credit: Ariel Jerozolimski)
Stn Fischer good 88 248
(photo credit: Ariel Jerozolimski)
Two items of bad news dominated our economic headlines this week - both unemployment and inflation appear to be on the rise again. These intertwined phenomena, if unchecked, bode ill for prospects of continued prosperity and stability. For months Israel's jobless figures were on a steady decline, but the latest stats indicated a 2 percent surge just in the past month. Moreover, during January and February, 435 workers lost their jobs in the traditional manufacturing sector (food, textiles, furniture, printing, etc.) alone, continuing a downward trend quite pronounced during 2007. Tinting the overall picture yet darker is a marked slowdown in hi-tech hiring, the worst in two years - particularly worrisome because in the last four years hi-tech accounted for two-thirds of industrial growth and over half of all new employment opportunities. Some companies are reporting layoffs. Concomitantly, the cost-of-living index took all and sundry by surprise when it climbed by 1.5%. The most pessimistic forecasts hadn't exceeded 1%. This isn't the first month in which actual inflation surpassed expectations. To be sure, Israel isn't alone in this predicament, as fuel and basic commodities grow more expensive globally. Additionally, local factors - including the springtime holiday season with its magnified demand and quirks like spiraling tomato prices - served to drive up prices. These dropped as soon as the holidays ended, confirming suspicions that the hikes were triggered by unwarranted exploitation of the sellers' market. Justified or not, such trade practices distorted the index. THE CUMULATIVE inflation rate for the past year has thus reached 4.7% - double the government's target. Israel's resurgent inflation has thereby outstripped that of comparable developed Western economies, giving rise to more cause for concern, especially against the backdrop of ostensible economic vigor and an unprecedented strong shekel, which should, theoretically, offset inflation. Renewed inflationary stirrings have revived the outcry for an interest rate increase - a conventional method of curbing demand-oriented inflation. The question, of course, is to what extent interest rate adjustment can counteract worldwide developments, and whether the cyclically erratic April CoL index mandates a move that will drive the shekel even higher against the dollar, hurt exports even further, skew the economy and severely impede growth. The shekel is, by all accounts, already unrealistically valued and the detrimental consequences are reflected in deteriorating employment figures. Higher interest rates attract international speculators, who would artificially boost the shekel further, inflicting greater damage on local entrepreneurs. To combat such profiteering, Bank of Israel Governor Stanley Fischer recently cut interest rates. Fischer is plainly being pulled in two opposite directions: to lower interest rates (to devalue the overpriced shekel) and to raise them (to restrain inflation). INDEED ANY choice can bring adverse results. And maintaining the delicate economic equilibrium isn't merely like walking a tightrope, it's like walking an invisible one. This requires particularly steely nerves on Fischer's part. Raising interest rates after having lowered them only lately will make him seem like the pawn of populist squawkers. Opting for conflicting tracks during short intervals will impart the impression of yielding to pressure. Mere expectations of higher interest rates have already driven the shekel to an 11-year high against the dollar. The contribution of an interest-rate hike to curtailing inflation is likely to be minimal, but the harm to local employers and employees will be significantly exacerbated. Whatever Fischer does, he won't mitigate the effects of global inflationary aftershocks. But as for homegrown inflationary accelerators, the remedy is in the hands of the general public. When goods are overpriced, they mustn't be purchased. When tomatoes suddenly retailed for as much as NIS14 a kilo, there was no reason to buy them. In paying exorbitant prices we fuel inflation far more than do low interest rates. Stanley Fischer is engaged in an unenviable balancing act. But we, the consumers, have the power to help him.