The purchasing power of our salaries will go down
As missiles and munitions define the visible cost of Israel's conflict with Iran, a quieter reckoning is gathering in the aisles of supermarkets and on utility bills across the country. The closure of the Strait of Hormuz has sent crude prices past $120 a barrel, and the inflationary pressure that follows will erode the purchasing power of ordinary Israelis in ways that military budgets do not capture. For a nation already ranked among the world's most expensive places to live, the energy shock arrives not as a single blow but as a slow tide — rising through food prices, transportation costs, and production expenses until the standard of living itself recedes. History offers a sobering parallel: the economic malaise that followed the 1973 Yom Kippur War, a reminder that the true cost of conflict is often tallied long after the fighting ends.
- Brent crude has held above $100 a barrel since the Strait of Hormuz was effectively closed, threatening to push inflation through every layer of Israel's already costly economy.
- Food prices that already run 51 percent above EU averages are poised to climb further as fuel costs drive up the price of growing, shipping, and importing essentials.
- Israeli firms facing surging production costs may freeze wages or cut jobs, leaving workers with salaries that buy less even as the bills keep rising.
- The government is caught in a fiscal vice — war spending is draining tens of billions of shekels weekly while falling consumer activity threatens to shrink the tax revenues needed to cover it.
- Economists see two divergent paths ahead: a swift resolution that opens a new era of regional confidence, or a prolonged conflict that risks a lost decade echoing the economic stagnation of the post-1973 era.
Israelis are already paying for war in the most direct ways — military spending, damaged infrastructure, shuttered businesses. But economists warn that a second wave of economic pain is still building, one that will arrive not at the front lines but in the supermarket and on the utility bill. The engine driving it is the effective closure of the Strait of Hormuz, through which roughly a fifth of the world's oil passes, now choked by Iranian military action.
Brent crude has climbed to around $120 a barrel since the conflict began, and prices have held stubbornly above $100 despite efforts to stabilize markets. For Israel, the energy shock compounds an already strained situation. Higher fuel costs ripple outward: diesel powers the trucks that deliver goods, ships that import them, planes that carry exports. Every product made or imported requires energy, and those costs get passed to consumers. Food — already about 51 percent more expensive in Israel than in EU countries — will grow pricier still, as will construction materials, pharmaceuticals, and electricity.
Esteban Klor of Hebrew University explains the mechanism clearly: when input costs rise, firms pass them on. Inflation follows. Salaries don't adjust immediately, so purchasing power falls. Workers find their money buys less. Some firms cut jobs or freeze raises. The standard of living declines — not from direct war damage, but through the invisible pressure of global energy markets pressing down on a country already ranked the fourth most expensive in the developed world.
The fiscal picture compounds the household one. Ronen Menachem of Mizrahi Tefahot Bank warns of double damage: as prices rise and demand falls, economic activity slows and tax revenues shrink — precisely when the government is spending tens of billions of shekels weekly on military operations, reconstruction, and the costs of a partially shut economy. Higher deficits mean more borrowing, and bills that will linger long after the fighting stops.
The path forward splits sharply depending on how the war concludes. A swift resolution, particularly one involving regime change in Tehran, could unlock regional integration and restore consumer and investor confidence. But a prolonged conflict risks something far grimmer — an economic malaise reminiscent of the decade that followed the 1973 Yom Kippur War. In Israel, as economists and historians alike understand, security and economics are not separate ledgers. They are the same account.
Israelis are already paying for war in direct ways—military spending, home front damage, business shutdowns. But economists warn that the real squeeze on household wallets is still coming, arriving not at the pump but in the supermarket, the restaurant, the utility bill. The culprit is the same one destabilizing global markets: the effective closure of the Strait of Hormuz, the narrow waterway through which roughly a fifth of the world's oil passes, now choked by Iranian military action in response to strikes by Israel and the United States.
Brent crude has climbed to around $120 a barrel since the conflict began more than two weeks ago, and despite efforts to stabilize markets, prices have held stubbornly above $100. For most countries not directly involved in the fighting, this energy shock is the primary economic threat. For Israel, it is secondary to the immediate costs of war itself—the munitions, the reconstruction, the lost economic output from shuttered schools and mobilized reserves. But secondary does not mean insignificant. The ripple effects of higher energy prices will eventually reach every Israeli consumer, in ways both obvious and subtle.
The most visible impact will come at the gas pump. Diesel and jet fuel, both crude derivatives, power the trucks that deliver goods, the ships that import them, the planes that carry tourists and exports. But higher fuel costs are only the beginning. Every product made in Israel or imported to it requires energy to produce and transport. Food, which already costs Israelis about 51 percent more than it does in European Union countries, will become more expensive. So will construction materials, pharmaceuticals, and the electricity that powers homes and businesses. Benjamin Bental, who heads the Economics Policy Program at the Taub Center for Social Policy Studies, frames it plainly: Israel is part of the world economy, and when the world economy is hit by an energy crisis, Israel bears some of that cost.
Esteban Klor, an economics professor at Hebrew University, explains the mechanism with precision. Every Israeli company uses gas and fuel as inputs to production. When input costs rise, those costs get passed to consumers. The first and main impact is inflation—a broad-based rise in prices that erodes purchasing power. Salaries do not adjust immediately. Workers find their money buys less. Firms struggling with higher production costs may cut jobs or freeze raises. The standard of living falls. This happens not because of direct war damage but because of the invisible hand of global energy markets.
Israel was already the fourth most expensive developed country in which to live, according to the Organization for Economic Co-operation and Development. Prices for goods and services run about 29 percent higher than the OECD average. Many essentials that Israel imports—fertilizers, metals, grains used in food production—will become pricier as transportation costs climb. Agriculture, construction, tourism, and airlines will feel the squeeze most acutely. Tech services and digital exports, less dependent on physical transport, will fare better. But the inflationary pressure will ripple across the entire economy.
Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank, warns of double damage: households lose disposable income as prices rise, and consumer demand falls as production costs increase. When manufacturing and spending contract, economic activity slows. Tax revenues fall. This arrives at a moment when Israel's government is already drowning in costs—tens of billions of shekels in weekly military expenses, reconstruction, and the hidden economic cost of a partially shut economy. Lower tax revenues mean higher deficits, more borrowing, and bills that will come due long after the fighting stops.
Klor sketches two futures. If the war ends with regime change and the removal of what he calls Israel's biggest threat, the country could enter a new era of regional integration and economic confidence. Consumer spending would recover. Growth would return. But if the conflict drags on, if the Iranian government survives, if uncertainty persists, Israel risks something far grimmer: an economic malaise comparable to the 1970s, a lost decade stretching back to the aftermath of the 1973 Yom Kippur War. The economy's trajectory depends not on market forces alone but on how the war itself concludes—a reminder that in Israel, economics and security are inseparable.
Notable Quotes
If the world economy is hit by another energy crisis, this is going to affect Israel, because we are a part of the world economy so we're going to have to be also carrying some of the cost.— Prof. Benjamin Bental, Taub Center for Social Policy Studies
If the Iran war ends with regime change and we succeed in removing Israel's biggest threat, it will be positive for the country's economy. But if not, and uncertainty remains, that could be the harbinger of a lost decade for the Israeli economy.— Esteban Klor, Hebrew University economist
The Hearth Conversation Another angle on the story
So the government controls fuel prices, which means Israelis haven't felt the oil shock yet. But that's actually the smaller problem?
Exactly. The government sets prices monthly, so there's a lag. But fuel is just the visible part. Every imported good, every locally made product—they all move through an energy-intensive system. When oil costs more, everything gets more expensive.
Israel already has one of the highest costs of living in the developed world. How much worse does this get?
Food prices are already 51 percent higher than in EU countries. Add energy inflation on top of that, and you're talking about real erosion of what people can afford. Especially for families living paycheck to paycheck.
The government is spending tens of billions a week on the war. How does an energy crisis make that worse?
Tax revenues fall when the economy slows down. So the government has to borrow more to cover both war costs and the shortfall. Those debts have to be repaid eventually, with interest. It's a compounding problem.
Is there any sector that actually benefits from this?
Tech services and digital exports are less vulnerable because they don't depend on physical transport. But agriculture, construction, tourism, airlines—they're all exposed. And the pain spreads from there.
What's the difference between this ending in a year versus dragging on for five?
Everything. If there's regime change and regional stability, confidence returns, spending recovers, growth comes back. If not, if uncertainty persists, you're looking at a lost decade—economically speaking, a return to the 1970s.