Inflation? You Call This Inflation?

Investors today may be worried about inflation, but it may be wise to view today’s rising prices with some historical perspective. This summer marks the 37th anniversary of Israel’s summer of hyperinflation, when prices rose nearly 500%. In 1984, the country was in an economic freefall, marked not just by devaluation of the shekel but by wholesale collapse of Israel’s financial institutions.

As it turned out, this economic crisis laid the foundation for Israel’s future success.

As it turned out, this economic crisis laid the foundation for Israel’s future success. At the core of Israel’s economic transformation over the past three decades was a gradual but fundamental restructuring of its financial system. Over the past 37 years, finance in Israel has moved away from its monopolized, bank-dominated, and sometimes corrupt past toward more competition, greater reliance on capital markets, fewer conflicts of interest, and a more commercial orientation.

Until recently, the inflation rate in Israel had been below 1% for seven years. With demand rising as the country recovers from the pandemic, inflation is accelerating toward 2%. (As of now, still well below the current 5.4% rate in the United States.) Israel’s relatively modest rate of inflation is a sign of how far the country has evolved beyond its hyperinflationary past, indicative of its solid economic foundations, and prelude to its future prosperity.

To learn more about the past, present, and future of Israeli finance, read our recent monograph here.