The Israeli Consumer Price Index (CPI) has experienced notable fluctuations recently, largely driven by shifts in labor costs within the construction sector and government-imposed tax increases. One of the most significant changes was a retrospective update in the residential construction input index, which surged by 2.6% in January. This increase stems primarily from rising wages for construction workers, a development that is expected to have lasting effects on housing prices and affordability.

A major factor behind the January spike in the construction input index is the shifting workforce composition in the construction industry. The war led to restrictions on Palestinian workers, who previously constituted a significant portion of the labor force. To fill the gap, Israel has turned to foreign workers, particularly from countries like India, who demand higher wages – more than double that of Palestinian workers. As a result, labor costs have surged, driving up overall construction expenses.

The Central Bureau of Statistics (CBS) updated its methodology to reflect the real composition of workers. Previously, the index was calculated based on outdated weight distributions set in 2011, which assumed a workforce that was 95% Israeli and only 5% foreign or Palestinian. In contrast, the actual workforce prior to the war consisted of approximately 71% Israeli and 29% foreign and Palestinian workers. The CBS has now adjusted the index to align with these realities, incorporating changes in worker composition and wage estimates that had been accumulating since the war began.

The result of these changes is a stark 5.3% increase in the residential construction input index over the past year and a 12.3% increase since the war started. The January update alone reflected a 4.5% increase in labor costs, compared to a mere 1.1% rise in other construction-related expenses. This recalibration means that real estate contracts linked to the construction index will now carry higher price tags, adding financial pressure on home buyers while benefiting property sellers.

Alongside construction-related price hikes, government-imposed tax increases have also played a pivotal role in driving up the overall CPI. A series of tax hikes that took effect on January 1 were among the leading contributors to inflation, particularly in four key categories: cigarettes and tobacco (up 5.2%), electricity (4.1%), municipal taxes (2.3%), and new cars (2.2%). If not for these tax-related increases, the CPI rise in January would have been only half of what was recorded.

Fuel and water prices, which are also regulated by the government, saw significant increases as well. However, one notable factor that helped to moderate inflation was a drop in flight prices. Airfare costs declined by 5.7%, as fewer Israelis travelled abroad in January, leading to lower demand and consequently lower prices. This decrease in flight prices helped to counterbalance some of the CPI’s upward pressure.

With the residential construction input index recalibrated to reflect actual market conditions, housing prices are expected to remain elevated, making affordability a growing concern for potential homebuyers. The combination of rising labor costs and government-imposed taxes suggests that inflationary pressures will persist in the near term.

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