How expensive is living in Israel? Less than you thought

How much do things cost in Israel compared to other countries? Much less than is commonly believed, according to a new study by the Shoresh Institution.

Heavily-cited OECD price calculations for the years 2005-2017, included distortions that made Israeli prices appear to be higher than they actually were in relation to the OECD average,  Prof. Dan Ben-David and Prof. Ayal Kimhi wrote in the report.

So for example, while OECD figures indicate that food prices in Israel were 36 percent higher than the OECD average in 2017, they were actually only 3.1% higher when calculated using purchasing power parities (PPPs), which use the prices of specific goods to compare the absolute purchasing power of the countries’ currencies.

That’s a much more accurate way to compare prices than by using foreign exchange rates, which often reflects the realities of financial markets more than those of the average citizen, Ben-David said. “A perfect example of how this works was in 2002, during the Intifada, when Israel’s exchange rate suddenly jumped to five shekels to the dollar in the course of a few weeks,” Ben-David said.

“That didn’t mean that prices all of a sudden jumped in stores. It was just because people were taking their money out of the country. PPP provides a more accurate picture of how much things actually cost for consumers.”

The OECD itself is inconsistent when choosing how to compare prices, Ben-David explained. “When the OECD compares prices between two countries, it accounts for economic differences between the two countries by using PPP,” Ben-David said. “Economists have been doing it that way for years, and that is the correct way to do it.”

However, when the OECD calculates price differences between multiple countries, it does so using foreign exchange rates, which can yield wildly different numbers. Ben-David and Kimchi calculated the size of the gaps between PPP and foreign exchange rates for OECD countries for 2017, the most recent OECD benchmark year for cross-country comparisons of various goods and services. The gap for the shekel was -4%, while in other countries, the gap ranged from 164% in Turkey to -23% in Iceland.

Comparing prices using PPP instead of exchange rates, Ben-David and Kimchi found that the actual price gaps were either lower, or reversed altogether, in each of ten categories. For example, prices for housing, water and fuel in 2017 were 24.3% higher than the OECD average, not 48% as reported. Restaurants and hotels were 15.6% higher than the average, compared to 39%, and transport costs were 2.1% cheaper than the average, instead of 22% more expensive.

Price gap between Israel and the OECD. (credit: Courtesy) Price gaps between Israel and the OECD. (credit: Courtesy)

That also means that comparisons of price changes over time compared with other countries were also skewed. Despite conventional wisdom, price gaps between Israel and the OECD did not rise across the board between 2005 and 2017, the report said. In fact, price gaps between Israel and the OECD actually fell in six of the ten categories.

“From the OECD numbers, one might expect that Israeli inflation rates during this period were higher, if not substantially higher, than those in most OECD countries,”Ben-David said.

“However, the opposite was true.  Annual inflation rates in Israel averaged 1.6%, below the majority of OECD countries – and in some cases, considerably below them.”

It is common for people to compare numbers based on exchange rates instead of PPP, Ben-David noted. “Even former PM Benjamin Netanyahu, in his last speech as prime minister on the Knesset podium, said as he often has that Israel has become wealthier than Japan, the United Kingdom and France. That’s true if you compare per-capita GDP using exchange rates, but if you compare per-capita GDP using PPPs, Israel comes at the lower end of that list.”