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The money supply has been rising rapidly over the past few months. The money supply - the total of amount cash and deposits available on demand is known as the M1 money supply - is one of the most important indicators of inflation. The total rise in the M1 money supply over the past 12 months through March 2009 was 40.6%, the Bank of Israel reported yesterday.

Such high growth in the amount of money floating around the Israeli economy was typical back in the early 1990s, but not since. In March the M1 rose 7.7%, the highest level in over a decade for a single month.

The real question is what do these numbers mean? One explanation is they signal the rebirth of inflation.

The total amount of cash and equivalents in March was NIS 86.1 billion, the highest amount ever. This is NIS 6.1 billion more than in February, and NIS 24.9 billion more money was available last month than in March 2008. In 2007 and 2008, the money supply rose 17.4% each year, and only 8.3% in 2006.

The Bank of Israel's calculations imply an expected inflation rate of 0.7% for the next 12 months, rising to 1.6% a year later and then 2.4% - based on figures calculated from the capital markets. The official government inflation target is 1% to 3% annually.

Commercial banks and economic consulting firms forecast the same 0.7% inflation over the next 12 months, says the Bank of Israel.

At the same time, the average interest the public is paying on its credit continued to fall in February, as the monthly interest rate reductions by the central bank had an effect.

The average interest was 4.4% in February, down from 4.93% in January and 5.74% in December. These are averages, as consumers were charged 7.99% for their overdrafts in February, down from 8.31% the previous month; but only 3.9% for short-term loans. The painful news is that the interest we receive from the banks on our savings is also falling, and is nowhere near the rates we are charged. The average interest paid on deposits in February dropped to only 0.94% from 1.48% in January. Those of us who earn interest on our checking account balances received only an average of 0.14% in February, ranging up to 1.17% for certain longer-term deposits.

The gap between what we pay the banks and what they pay us remained stable at 3.45% in February.