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Early estimates were for a high Consumer Price Index for July - 0.7%-1% - so Friday's announcement of a 1.1% increase didn't shock anyone, especially not if they were familiar with the July numbers of recent years - in 2005, 2006, 2007 and 2008, the July CPI rose 1.1%.

July is a month of price hikes, each year for its own reasons. Last month's CPI was the highest yet this year. In January and February the CPI declined, but starting in March the CPI increases were above average, and in both April and June the rises approached that of July, at 0.9% and 1%, respectively.

The reasons for the high CPI is June and July are similar: price increases, particularly in the energy and housing sectors, and tax hikes. These include the 1% increase in value-added tax, from 15.5% to 16.5%; the intentional increase in car prices (euphemistically termed a "green tax," for its purported environmentally correct ambitions, by the Finance Ministry); the increased water fees (known euphemistically as the drought tax); and previously implemented increases in the cigarette and gasoline taxes.

Analysts estimate that 50%-75% of July's steep CPI rise is a direct result of these tax hikes. Since the CPI for both August and September is expected to be high, there is a very good chance that Bank of Israel governor Stanley Fischer will once again overshoot the government's 1%-3% annual inflation target. So far this year, the cumulative Consumer Price Index has risen by 3.2%. According to the Central Bureau of Statistics, the CPI increased by 5.1% in the April-July period - and that's a lot.

Friday's figures set off warning lights in Fischer's office. Next Monday the central bank chief will announce the base interest rate for September. For the past five months that rate has been 0.5%, the lowest since the state was founded in 1948. Five months of interest rate stability has been a rare commodity in the Fischer era.

In eight days, Fischer will either announce that he's maintaining that stability, or that he will start increasing rates.

It's a tough decision, with good arguments on both sides. On one hand, inflation is rearing its ugly head in Israel, and the main job of the governor of the Bank of Israel is to maintain price stability - which means raising interest rates. On the other hand, increasing interest rates will hurt our still-hurting economy. It will increase unemployment and boost the appreciation of the shekel against the dollar.

We can already predict the arguments being marshaled in the Bank of Israel ahead of the deliberations on interest rates. Those who are against an increase will argue that the high CPI increases of June and July - and, presumably, August - are mainly the result of tax hikes whose affect will fade in the months to come, and for that reason they should be discounted as factors. The other side will say that Fischer used this argument in the last two rounds of interest-rate deliberations, and if the central bank doesn't wake up in time, it could wind up with runaway inflation, exacting a heavy price on the economy. Our assessment: Fischer will raise interest rates.