Main points:
- This analysis examines the factors that influenced inflation and GDP in Israel from the first quarter of 2020 through the first quarter of 2025. The analysis distinguishes between demand shocks, supply shocks, and monetary shocks — all defined as changes in demand, supply, or monetary policy that cannot be anticipated based on the past development of macroeconomic variables.
- During the post‑COVID recovery period (2021–2023), inflation was primarily driven by positive demand shocks, alongside supply shocks that mainly restrained economic activity.
- Following the outbreak of the Swords of Iron war in October 2023, supply shocks became a significant factor contributing to the increase in inflation, in view of disruptions in the labor force (due to reserve mobilization and reduced availability of non‑Israeli workers) and interruptions in supply chains.
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