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The inflation survey that appears here every year shows something of our lost innocence. The stated goal of 2003 economic policy is 1-3 percent inflation and price stability. Capital market inflation expectations are also below 2 percent. And yet, the 109 business leaders in our survey projected an average consumer price index rise of 3.8 percent for next year.

In last year's survey, we were innocent children. We believed that Finance Minister Silvan Shalom and Bank of Israel Governor David Klein would make it to the end of the year in the 2-3 percent range they set, with the survey average coming in at 2.1 percent. But the confidence of last year is gone - justifiably. This year's inflation rate will be in the 6.5-7.0 percent range, far above last year's most pessimistic guess, which came from venture capital maven Shlomo Kalish, who offered a daring 5 percent.

Looking back, it is hard to understand how we missed then that an inflationary outburst was inevitable. Just a week before the end of the year, on Sunday, December 23, 2001, came the famous press conference in which Klein announced the reduction of interest rates by an entire 2 percent - something that now sounds outrageous - to 3.8 percent. Shalom praised the move, as did treasury director-general Ohad Marani.

It was already clear then that the budget deficit would be 5-6 percent, and it should have been self-evident that the public was about to lose its confidence in the finance minister, long-term interest had to rise, and the run on the dollar was inescapable and would lead to an inflationary outburst. Today, it is clear we didn't get it - except for Shlomo Kalish.

Bank of Israel Governor David Klein has certainly learned the lesson and it will be a very long time before the next sharp reduction in interest rates. Finance Minister Silvan Shalom has also learned, although he is in an impossible position, as he must immediately cut the state budget (assuming a Likud election victory) by NIS 10 billion so as to prevent the worst crisis yet.

But since he, Prime Minister Ariel Sharon and the entire Likud party believe in not evacuating settlements and not negotiating, that cut is going to be tougher than ever. The settlements will ask for more: They have just asked for NIS 1 billion in electronic fencing. Spending on the social agenda will climb with the unemployment rate; the military will demand more budgets for the war in the territories and against terror; and the war in Iraq will cost a pretty penny, as well as paralyzing the home front, making the NIS 10 billion cut insufficient.

And then, when Israel's sovereign credit rating is downgraded, and the state is embroiled in serious crisis, even Klein's high interest rates won't manage to harness inflation or the flight of capital abroad. So we can expect more high inflation in 2003 - far above and beyond the optimistic numbers in the government plans.