Abstract
This study examines how changes in inflation expectations affected the relationship between wages and GDP per worker in Israel, and how these relationships have translated into actual inflation during a period of price stability (2003-2019).
The research finds that a one percent increase in inflation expectations leads to a temporary deviation of 0.1% to 0.2%, in the wage level, from the corresponding level of GDP per worker, and to a permanent increase of approximately 0.1% in the consumer prices.
Furthermore, the research finds that given GDP per worker, a one-percent increase in the wage level leads to a cumulative increase of approximately 0.1% in the Consumer prices. Combining these three pass-through channels, reveals that the effect of inflation expectations on prices, through the wage channel, constitutes at most only about one-fifth of all the channels through which inflation expectations affect prices.
These results align with estimates reported in the literature for advanced economies for a period in which inflation is low and expectations are anchored.
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