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The Consumer Price Index shot up 1.3 percent in June, far exceeding even the most pessimistic forecasts. The CPI has, thus, risen 6.3 percent in the last six months - compared to only 6.6 percent for the entire previous 12-month period.

According to the Central Bureau of Statistics, which computes the index, annual inflation is now running at a pace of about 9 percent - more than triple the government's target of 2-3 percent.

Furthermore, bureau economists said, July's inflation rate was also almost certain to be abnormally high, thanks largely to a series of government-approved price hikes in monopolistic industries such as electricity and water. Therefore, barring a series of unexpected price declines in the second half of the month, they said, the July CPI would rise by at least 0.7 percent - even though the Wholesale Price Index, which is normally considered a good predictor of future inflation, rose by only 0.5 percent last month.

The high June CPI also creates a big question mark with respect to interest rates. Most economists had predicted that if the CPI rose by less than 1 percent, Bank of Israel Governor David Klein would leave rates unchanged this month, after having hiked the central bank's key rate by 4.5 percent in June. But with inflation so unexpectedly high, Klein may now decide on an additional rate hike - despite the fact that this would have a further dampening effect on an economy already deep in recession.

June's inflation stemmed from rises in just about every component of the CPI, with sharp increases in food (1.4 percent), housing (2.0 percent), shoes and clothing (4.7 percent) and transportation and communication (1.5 percent). These rises were slightly offset by a 4.7 percent seasonal decline in produce prices.

Much of the past half year's inflation can be attributed to the 15.5 percent depreciation of the shekel during this period. The exchange rate influences such key items as housing prices (which are set in dollars for both sales and rentals), electricity (since most fuel is imported) and transportation (both gasoline prices and the purchase price of cars, which are also all imported).

Since the stiff interest rate hikes in the middle of last month, however, the shekel's slide against the dollar has largely halted. Yesterday, the dollar lost 1.2 percent against the shekel, bringing its representative exchange rate down to NIS 4.67. At its peak three weeks ago, the exchange rate stood at NIS 4.982 to the dollar; since then, the American currency has fallen by more than 6 percent.

Finance Minister Silvan Shalom therefore predicted yesterday that inflation would fall markedly in future months. The June CPI, he said, was still heavily influenced by the dollar's climb, but it ought to be the last month so affected.

But MK Amir Peretz, chairman of the Histadrut labor federation, promptly announced that workers would demand a cost-of-living increase to compensate them for the steep inflation to date - an increase that might feed further inflation by forcing manufacturers to raise prices to cover their increased costs. Peretz said the Histadrut leadership would hold an emergency meeting today to consider declaring a work dispute over the issue.

Though the shekel's recovery has not yet had an impact on inflation, it has helped stabilize the capital markets: The share market has risen 8 percent since its low of three weeks ago, while shekel-denominated bonds have gained around 15 percent.

Market players say that in addition to the interest rate hike, several other factors have contributed to the shekel's gains - the dollar's worldwide weakness, the relative calm on the security front recently, the Knesset's approval of a budget cut for this year, the government's announcement of a further steep budget cut in 2003, and the efforts to rein in expensive private legislation, which finally bore fruit with the Knesset's approval last night of a law to restrict such bills.