The document hidden on the State Comptroller's website explains how to correctly measure the cost of living

For years, the assertion that Israel is one of the most expensive countries in the OECD has become almost an accepted fact. It has appeared in government reports, in discussions about the cost of living, and also in media headlines. However, a professional document published by the State Comptroller's office a few months ago, which was not widely distributed, raises questions about one of the comparisons on which this assertion is based, and warns that incorrect use of international price level indices can create a misleading picture of Israel's situation.

The document, written by researchers Yaron Fishman and Nir Lesser, was published last February under the title "Indices for international comparisons and countries comparable to Israel in the field of cost of living." It was originally intended to serve as a professional guide for audit teams in the Comptroller's office, but the conclusions that emerge from it are much broader.

The office's economists point out that the price level index accepted for comparison between countries is significantly influenced by exchange rates, and therefore can present Israel as more expensive or cheaper even when the prices that the Israeli consumer pays have not changed accordingly at all.

One of the prominent examples of this was recorded in 2023, when the consumer price index in Israel rose by 4.2%. Despite this, in the international price level index, Israel actually became, apparently, cheaper. Its index fell from 131 to 122, and it dropped from second to fourth place among OECD countries. The main explanation was not a decrease in food, housing, or service prices, but the weakening of the shekel against the dollar.

From here comes one of the central arguments in the document: an index intended to compare the price level between countries at a certain point in time is not necessarily a suitable tool to determine how the cost of living in Israel has changed over the years. The strengthening of the shekel can raise Israel in the ranking even if local prices have hardly changed, while a devaluation can lower it in the ranking even during a period of price increases.

The gap is especially prominent when examining the food sector. According to data presented by the State Comptroller's office, between 2011 and 2020, prices for food and non-alcoholic beverages in Israel rose by about 6.2%, compared to an increase of about 19% on average in OECD countries. Despite this, the international price level index indicated during that period an apparent widening of the gap to Israel's disadvantage.

In recent years, a similar picture has also been obtained. Between 2017 and 2023, food prices in Israel rose by about 13.6%, while in the OECD average, an increase of about 38.8% was recorded. The data do not indicate that food in Israel is necessarily cheap, but rather that the rate of price increases in Israel during this period was significantly lower than that recorded in many countries in the organization.

Not cheap, but not abnormal

However, the document also does not provide a basis for the opposite conclusion, according to which the cost of living problem in Israel is a statistical illusion. When the Comptroller's office examines the purchasing power of Israelis, the picture is more complex.

For example, according to one of the indices examined, the median disposable income in Israel allowed in 2022 to purchase about 20.7 thousand units of a standard "food basket," compared to about 24.6 thousand on average in the OECD. That is, even if the price level alone does not tell the whole story, the purchasing power of households in Israel is still lower than the average in some comparisons.

To measure the cost of living, it is not enough to ask how much a product costs in Israel compared to France, Germany, or the USA. It is also necessary to ask how long an Israeli needs to work to purchase it, and what is the share of the expense out of his disposable income.

Accordingly, the State Comptroller's office recommends that its researchers not rely on a single index, but use a series of complementary indices, including the purchasing power of hourly wages, median wages, and disposable income, alongside the price indices themselves. In this way, according to the document, it is possible to distinguish between a situation where Israel is indeed more expensive and a situation where the gap in the ranking is mainly due to movements in currency exchange rates.

The examination also shows that the picture varies greatly between sectors. In the index that takes into account the overall price level in each country, the gap in food in Israel is no longer abnormal and is even slightly below average, while in areas such as restaurants and hotels or housing, water, electricity, and gas, Israel is still significantly more expensive. On the other hand, in other areas, including transport and communications, the picture is better.

Incorrect comparison

Another issue raised in the document concerns the question of who it is even correct to compare Israel to. In many discussions, Israel is compared to the average of 38 OECD countries, but the gaps between those countries are enormous: in income levels, in productivity, in tax structure, and in government policy.

The Comptroller's office suggests distinguishing between countries whose economic situation is similar to that of Israel and countries that Israel seeks to approach. The first group includes, among others, the UK, France, Italy, Spain, Japan, and South Korea. Alongside them, another group of "benchmark countries" is proposed, including the Netherlands, Denmark, Sweden, Austria, Finland, and Switzerland.

Apparently, this is a methodological and dry discussion, but in practice, it touches the heart of one of the central economic debates in Israel. When the government, regulators, or the media state that Israel is "the second most expensive country in the OECD," the choice of index is not just a technical matter, and it affects the way the problem is defined and also the policy intended to solve it.

However, the methodological debate does not change the fact that in other indices, which try to take into account also the standard of living and the characteristics of the countries to which Israel is compared, a tough picture is obtained. A study by the Aaron Institute for Economic Policy at Reichman University published this year found that the basket of goods and services of a household in Israel is about 21% more expensive compared to a group of rich countries such as Austria, Finland, Denmark, the Netherlands, and Sweden, even though the GDP per capita in these countries is higher.

Compared to Greece, Cyprus, Italy, and Spain, where the GDP per capita is lower than in Israel, the gap reaches about 68% according to the study. The researchers estimated that the cost of living erodes the standard of living in Israel by about 14%, according to the indices presented in the study.

Even within the Israeli basket, there are areas where the gaps compared to the world remain abnormal. According to the same study, while in 2005 housing prices in Israel were about 31% lower than those in the group of rich countries examined, today they are about 26% higher than them. Compared to Southern European countries, the gap reaches up to 85%.

Also in food, until two decades ago, prices in Israel were about 26% lower compared to the rich countries examined, and today they are about 27% higher. The researchers attribute the gap, among other things, to trade barriers, regulation, the centralized structure of some markets, production and distribution costs, and unique characteristics of the Israeli market.