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The consumer price index (CPI) for February fell by 0.2%. Over the last three months, inflation has been rising at a 3.6% annualized rate, according to figures released by the Central Bureau of Statistics last Friday.

Economists' forecasts for last month's CPI were in the range of a 0.3% fall, after January's CPI was unchanged.

The major factor that lowered prices in February was a 7.1% fall in clothing and shoe prices, even though fruit and vegetable prices rose 6.4% due to the spell of bad weather.

But inflation did not affect everyone equally. The rise in prices for the top-earning 20% of the population was only 3.1% in annual terms in the November 2007 to February 2008 period, but for the poorest 20%, inflation rose 4.7%.

But in February the effects were also particularly strong, as food prices for the lowest-earning 20% rose a whopping 9.4%, while those for the richest 20% were up only 7.3%.

For the last 12 months, inflation has been 3.6%. Without including housing prices, inflation would have been 4.7% for the past year, but the fall of the dollar has moderated overall price levels - even though prices increased in almost all the other categories. Excluding energy costs, another major force pushing prices upward, the CPI for the past year would have risen only 2.8%.

Housing prices fell 1.4% in February, and transportation costs were down 1.3%. Offsetting these drops were a 1.4% rise in food prices, and 1.1% in household maintenance.

Education, culture and entertainment prices dropped 0.1% in February, while health service costs rose 0.3%.

The February drop followed a zero CPI in January and four months of positive inflation before that. Forecasts are for the March CPI to be negative too, by about 0.3%.

However, inflation in the second quarter is expected to be high, and 2008 inflation will be in the 2.5% range. The cabinet and Bank of Israel's inflation target is 1-3% for all of 2008, and the central bank expects inflation to drop later this year to reach about 2%, the midpoint of the target range.

The question government ministries are asking is whether the governor of the Bank of Israel, Stanley Fischer, will lower interest rates for April next week - and if so, by how much.

Expectations are that Fischer will lower rates 0.25%, but after surprising everyone last Thursday by buying dollars, the question is wide open.

The Manufacturers Association called on Fischer to continue lowering interest rates to encourage economic growth.

However, before Fischer has to make his decision, the U.S. Federal Reserve Board will meet and announce how much it is cutting rates.

If the Fed lowers short-term interest rates by 0.5%, or even 0.75%, the interest rate gap between the U.S. and Israel will grow again, and this will certainly affect Fisher's decision, as will what happens to the dollar in the next week.

The shekel-dollar interest rate gap is now 0.75%, with the shekel paying higher interest rates.

Of course, the lower dollar lowers inflation in Israel, and lessens the effects of rising energy prices. Therefore, quite a lot can happen in the time remaining before Fischer has to make his interest rate decision.